By Leigh Thomas

PARIS (Reuters) - French municipal borrowers are seeing the cost of billions of euros in Swiss franc-linked debt spiral dangerously higher, forcing the state to consider lending them a helping hand.

Up to the 2008-09 financial crisis, many municipalities and local governments took out long-term loans linked to foreign currencies, offering low interest rates in the initial years and floating rates afterwards.

Some 10 billion euros ($11.5 billion) of that debt is still outstanding and nearly half of it is tied to Swiss francs, according to Christophe Greffet, a politician in northeastern France who leads an association defending borrowers saddled with "toxic" structured loans.

"The euro's drop against the Swiss franc has clearly led interest rates to explode," he told Reuters. "We've got interest rates that are doubling and in come cases tripling."

The Swiss franc's exchange rate skyrocketed by nearly 30 percent on Thursday after the Swiss National Bank unexpectedly scrapped its cap on the currency.

"Conscious of the significant impact of these developments on local finances in the coming weeks, the government has decided to review the conditions for helping local authorities with the support fund," junior budget minister Christian Eckert told Reuters.

The government has already set up a fund - financed half by the state and half by a special tax on French banks - that will provide 100 million euros annually to help local governments deal with toxic structured loans on their books. As it is currently planned, the fund will be available for 15 years and provide a total 1.5 billion euros in support.

"The fund was already insufficient before the Swiss franc problems, but it is all the more so in light of the exchange rate risk," said Fitch Ratings international public finance director Christophe Parisot.

LOOMING ELECTION

The interest rate spike is all the more unwelcome because local governments' budgets are getting increasingly squeezed as the central state government plans on cutting funding to them by 3.7 billion euros annually until 2017.

The governments' willingness to help local authorities cope with surging interest costs comes as the ruling Socialist Party faces the prospect of heavy losses in local elections in March.

While structured loans were made in other European countries ahead of the financial crisis, banks manufactured them on an "industrial" scale in France, Greffet said.

Local governments hoping to tap the state fund have until mid March to lodge a request, but they have to give up the right to sue the SFIL, a state-backed municipal finance body.