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A clog in the system: What if a university goes bankrupt?

 

Andre Farrugia
Andre Farrugia

We’re all used to student debt in the UK. But what about if the University you study at suddenly has debt which makes your student loan seem miniscule in comparison? Lisanne Oldekamp examines a worrying situation in the Netherlands.

The University of Amsterdam’s bankruptcy is still not definite. But students of the university, in Dutch known as UvA, might have had the question wandering through their minds last week. An article published on Dutch website De Correspondent painted a picture of the university’s economic situation – and it does not look pretty.

How it all started
The current problem can be traced back to the 1990s. After experiencing decades of growth in the numbers of students, Dutch universities were very optimistic about the future. However, in the mid-1990s this increase stagnated. This in itself can perhaps be overcome, but the decrease in freshmen came shortly after the Dutch government implemented large budget cuts that severely impacted the universities’ budgets.

These governmental budget cuts became necessary when European countries committed themselves to launching a common currency, the euro, at the Maastricht Treaty in 1992. Part of the agreement was that the participating countries’ budgetary deficit could not exceed three per cent. In order to reach this limit, the Dutch government had to make some major budget cuts. These included the return of ownership of the Dutch universities’ buildings to the universities themselves.

This was the first sign of trouble for the UvA. As explained by Radboud University’s professor of economics Eelke de Jong: “When the universities were handed management of the buildings, they did not receive the proper amount of money to maintain them. Buildings are great, but they come with costs.” These maintenance costs tripled the universities’ balances. In order to decrease these costs, the University of Amsterdam decided to cluster its four largest faculties in four faculty buildings. Although in the long run these measurements were supposed to reduce maintenance costs, the expense of this restructuring plan created a new burden for the UvA’s budget.

Banking for dummies?

The university’s budget could not cover the expenses of the restructuring plan, which were estimated at 445 million Euros. Thus, the Board of Executives had to search for external beneficiaries – which eventually were found in the form of loans at two large Dutch banks. Naturally, a loan must be repaid – with interest. Since interest rates can fluctuate over time, as well as taking until 2030 to pay off the loans, the bankers convinced the university’s Board of Directors to buy interest derivatives – and that’s where we reach the tricky part.

Derivatives can be beneficiary: they form what can be described as a kind of insurance against the fluctuation of the interest rate. Without such an insurance, the interest rate can both rise and fall – which could potentially cost the lender money. Professor De Jong describes these interest derivatives as follows: “Imagine you want to buy a building, and you want to pay an interest of five per cent. If you want to contract a loan with a fluctuating interest rate, you are not certain that you pay that 5 per cent. In such a case, you can buy an interest derivative. If the interest rate rises, you obtain an amount of money from the derivative so that you still pay only five per cent. If the interest rate drops, you have to pay the difference yourself. That might seem disadvantageous, but keep in mind that these buildings last for thirty or forty years. Since it is impossible to predict the interest rate over such a long period, it might indeed be wise to create stability by buying off a fixed interest rate of five per cent.”

“However, the University of Amsterdam has contracted more derivatives than it needed, creating a speculative situation that has become detrimental”, explains De Jong. Due to the financial crisis, which started shortly after the University bought its interest derivatives, the interest rates had been low for years. “They probably took a chance and hoped that the interest rates would increase, thus being able to lay by some money. That money would have been very welcome given the fact that the universities received too little money from the government for the maintenance costs of their buildings.” In the current financial climate, the UvA’s derivatives cost the university lots of money. Assuming its restructuring plans do not encounter any financial setbacks, the university’s debt levels will reach an amount of 400 million Euros in 2018.

Risk-taking

So why did the university take these financial risks in funding its restructuring plans? De Correspondent argues that the Board of Directors was swept off its feet by optimism and by what is described as the ‘property intoxication’ in the financial climate at the time. Furthermore, an optimistic report by an external advisory agency announced that the UvA had a promising future, in which it would attract students from all across the world to study in the Dutch capital. Therefore, the Board must have felt confident, and the derivatives seemed a calculated risk. Finally, as pointed out by De Correspondent, the UvA’s Board of Directors at the time consisted mostly of people with a background in finance – professional directors, switching boards every few years. As brilliant as they might be as heads of stock-listed companies where making profit is the only goal, they lack experience in the field of research and education. As a consequence, it is suggested, the university has focused too much on money and profits – in a way, it has become a financial rather than a scientific and educational institution.

filmfrenzy
filmfrenzy

Student rates

So where does this financial picture leave the students? De Correspondent argues that there might be certain consequences for the students: “If the market rate is still low when the contracts end – and the first ended on October 10 last year – the UvA might encounter heavy [financial] losses, which in a worst case scenario would be at the detriment of funding for research and education.”

Currently, more indirect consequences appear to already be having an effect on the students and researchers at UvA. As described before, the balance between scientists and people with a financial background has turned over to the financial side. According to De Correspondent, this affected not only the university’s financial situation (which became very opportunistic), but also the scientific and educational climate in the university. This has created a climate in which the results became central: the university needs to be an effective, oiled machine that produces research and graduates on a regular basis.

Although such a trend is found across the nation, the financial situation in other Dutch universities is far better than that of the UvA and its Amsterdam counterpart the VU (Free University). Professor De Jong said: “Although I am not fully aware of the Radboud University’s budget, I do know that our Board has always been very conservative in this field.” The provincial Radboud University has never experienced the ‘property intoxication’ that affected the UvA’s Board of Directors. It is perhaps not surprising that two universities based in the capital of the nation, surrounded by multinationals, were swept off their feet in the heyday of the Amsterdam stock exchange.

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