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LISBON, April 12 (Reuters) - The Portuguese state and the local unit of Spain's Santander have agreed to end years of litigation over 1.8 billion euros in public firms' swap contracts, and Santander will extend a long-term loan to Portugal for the companies to pay what they owe.
The finance ministry said on Wednesday that the state will make sure that the companies abide by a London court decision last year recognising the contracts as valid and governed by English law, and will no longer appeal to the UK Supreme Court.
Santander-Totta will give up on a lawsuit demanding compensation from the state in Portuguese courts and will provide a 2.3 billion euros 15-year loan to the state at a beneficial interest rate that will save Portugal 442 million euros in interest payments over 15 years.
"The terms allow for a reduction of costs associated with the swaps by 36.8 percent," the ministry said.
The contracts were agreed to protect public transport companies and Santander's local business against any rise in Euribor interest rates. But the deal backfired when Euribor rates slumped, and in 2013, the government challenged several of the interest rate hedge contracts in court.
The companies most exposed to heavy interest payments from these swap contracts were Lisbon Metro and Porto Metro. They had since stopped payments on the contracts. (Reporting By Andrei Khalip, editing by Axel Bugge)