Irish default. Savings / Borrowings

NewDirection

From my limited reading of internet message boards, my understanding of an Irish default and return to the Punt would go something like this:

Savings held in all banking institutions in Ireland, would change from Euro to Punt.
Mortgages and loans held in all banking institutions in Ireland, would stay in Euro.

So when the inevitable devaluing of the punt happens, we would be left with worthless money to pay off massive Euro debts.


1) Is this the case or have I this all wrong?
2) How is this even fair (or should I check the small print in my loan agreement) ?
3) How do I cover myself against this series of events happening?

Thanks

Sam the Sham

NewDirection wrote: »

From my limited reading of internet message boards, my understanding of an Irish default and return to the Punt would go something like this:

Savings held in all banking institutions in Ireland, would change from Euro to Punt.
Mortgages and loans held in all banking institutions in Ireland, would stay in Euro.

So when the inevitable devaluing of the punt happens, we would be left with worthless money to pay off massive Euro debts.

The last part isn't the case. If it were, it would make the whole idea of exiting the euro pointless. What happens is rather this:

The new punt is introduced at a rate of 1 euro = 1 new punt. All debts and savings and salaries are converted to new punts at that rate. Then and only then is the currency is allowed to float on the markets and it immediately drops significantly. This has the effect of decreasing the debt by however much the currency ends up dropping.

It also means that your savings and your pay packet will be devalued along with your debts. If you owe euro to some non-Irish institution, that debt wouldn't be denominated in new punts and would be onerous (see what happened to Icelanders, who borrowed heavily in euro, when their currency was devalued for a flavour).

quad_red

Sam the Sham wrote: »

The last part isn't the case. If it were, it would make the whole idea of exiting the euro pointless. What happens is rather this:

The new punt is introduced at a rate of 1 euro = 1 new punt. All debts and savings and salaries are converted to new punts at that rate. Then and only then is the currency is allowed to float on the markets and it immediately drops significantly. This has the effect of decreasing the debt by however much the currency ends up dropping.

External debts will still be in Euros. Even after a 'haircut'. Unless you default on everything.

If you have a mortgage for 300,000 euro to Ulster Bank, they want euros back, not paddy dollars.

NewDirection

And if you had a mortgage with BOI or AIB for example, would this convert to punt nua, or could they pull a stunt and demand Euro's back.

I assume all the bank debts would still be in Euro's, so they'd probably be bust as soon as the punt nua was floated.

andrew

This'd be better off in Irish Economy

hmmm

NewDirection wrote: »

1) Is this the case or have I this all wrong?

It is extremely unlikely that we will default and leave the Euro at the same time. It is extremely unlikely that we will have a chaotic default where everyone's savings get wiped out.

What is possible (some would say probable although I disagree) is that our debts would be written down in a controlled manner in conjunction with assistance from other European countries.

2) How is this even fair (or should I check the small print in my loan agreement) ?

It's not meant to be fair, it's a humiliating acceptance by a country that its people are incapable of running their own affairs in a competent manner. A default is not some minor legalistic manoeuvre where you can read through your loan document for advice, it is an entire country going into bankruptcy and most bets are off.

3) How do I cover myself against this series of events happening?

Whatever the cranks are recommending. They've been calling the end of the world for a few years now, you should be able to buy out of date beans and rusty ammunition cheap from them.

later12

NewDirection wrote: »

Savings held in all banking institutions in Ireland, would change from Euro to Punt.
Mortgages and loans held in all banking institutions in Ireland, would stay in Euro.

No this really wouldn't make sense. The whole point of an exit and rapid devaluation on employment and exports would be lost by Irish mortgages remaining euro denominated and going bust. In practice, Ireland would almost certainly denominate its Irish mortgages into an punt nua. If not, the people would go bust.

Now if the assets have been denominated in an punt nua, one could reasonably ask how the liabilities could avoid the same fate. Irish law liabilites, too would switch currency. If not, the banks would be unable to honour these liabilties and the banks would go bust.

However, all sovereign liabilities would remain subject to foreign contracts. That cannot be changed. And how does a state that has just taken on this new devalued currency ever honour its obligations when it could not honour them on a euro basis.

The alternative is to leave all assets and liabilites denominated in euro, and to leave all salaries euro denominated. In summing up, it makes no sense to leave the euro. If we restructure our debt, we must do so inside the euro.

By the way, I must remark that it is quite alarming that we have already given our new currency, an punt nua, a name.

ardmacha

In summing up, it makes no sense to leave the euro. If we restructure our debt, we must do so inside the euro.

Exactly.