What happens to personal debts if the euro collapses?

Cavehill Red

Here's a question I'd be interested in informed opinions on, arising from a discussion in another thread: what happens to debts and savings denominated in euro in Ireland in the event that Ireland leaves the eurozone as it is currently comprised?

Let's say the euro collapses and either we revert to the punt (call it punt nua) or we enter a second-tier eurozone that doesn't include Germany (the non-German euro or NGE).

If I have 10 grand of old euro in the bank, do they become punts nua or NGE and devalue overnight, or can I insist that they be denominated in German euro? I presume the answer to this is that they devalue and that's my bad luck.

However, what about debts? If I have a tracker mortgage contracted in old euro to track the ECB rate set in Frankfurt, and we revert to punts nua or NGE, can I insist that my mortgage remain tracking the rate set by the (now smaller) ECB in Frankfurt and remain in German-related euro?

Or if the banks insist that my mortgage must migrate to the new currency, will that result in my interest rate increasing but the actual value of my debt decreasing as the new currency devalues?

hmmm

During Argentina's default, foreign currency holdings and loans were forcibly redenominated into pesos and access to bank accounts were frozen. That's the chaotic scenario.

I doubt chaos is on the card however, the Anglo Saxon media and financial markets are always demanding instant short term results which aren't required in this instance. Merkel is right, there is plenty of time to sort out the legalities before the profligate nations are bailed out by the German taxpayer.

Slydice

Depends on what happens to ireland after the collapse and what the politicians of the day want to do.

what if we end up:
- in a split euro group on the strong side
- in a split euro group on the weak side
- back with "an punt nua":rolleyes:

who do the politicians want to piss of:
- us
- bankers
- other european countries

loads of factors and nothing is really clear at the moment. on one extreme I read about how the euro is ****ed and so are irish depositers... then... on the other extreme it's all about us becoming part of the united states of europe... i just dunno... it's all a little much right now:(

Cavehill Red

Whatever about the likelihood of it happening, I'd like to play the what-if game of if it does happen.

Say we follow the Argentinian route - all debts and assets forcibly redenominated - presumably that benefits those with personal debt while hurting those with savings, correct?

But what other possibilities are there? I'm trying to second-guess bank motivations here as well as explore legalities. Is it in the banking sector's interest to redenominate if they have large mortgage and loan books domestically which will suddenly be worth much less?

Could they demand redenomination of savings but not loans, for example? And if so, would that be challengable in court as breach of contract?

Liam Byrne

I was actually thinking about this last night and couldn't phrase it properly.

Say you have 10K in the bank and a 100,000 mortgage, which makes you a net 90K in debt.

Now assume that the new currency comes in at 1:1, but devalues to 2:1 giving you 5K (euro) in the bank.

Theoretically the same devaluation should leave you owing the bank 50K (euro), maintaining the 45K difference @ 2:1

But given that your bank still owes the 100K to (presumably) someone abroad, does that mean that they'll hit you for twice as much of the new currency, thereby doubling your mortgage overnight ?

And would they get away with this even if your 10K was invested (by them) abroad or in foreign currency, since you wouldn't know ?

hmmm

Cavehill Red wrote: »

Could they demand redenomination of savings but not loans, for example? And if so, would that be challengable in court as breach of contract?

In the event of a breakup, the courts around the world are going to be full of challenges as most contracts make no provision for the collapse of the Euro. All bets are off.

I can think of several scenarios (all unlikely), all with different outcomes:
- Ireland leaves the Euro but not the EU - redenomination of savings, but not Euro loans, banks open the day after
- Ireland leaves both - redenominate all to punt nua, banks open day after
- Ireland leaves both and defaults on government debt, banks closed indefinitely

One of the most interesting options is to run a parallel currency, which will allow a country to guage the impact of leaving the Euro proper. Massive downsides to that however, you've tipped your hand.

hmmm

Liam Byrne wrote: »

But given that your bank still owes the 100K to (presumably) someone abroad, does that mean that they'll hit you for twice as much of the new currency, thereby doubling your mortgage overnight ?

That's the problem, our bank funding largely comes from abroad (and the ECB). We can redenominate all loans, but then the taxpayer and the state ends up on the hook. Or we could default and deal with those consequences.

Cavehill Red

hmmm wrote: »

In the event of a breakup, the courts around the world are going to be full of challenges as most contracts make no provision for the collapse of the Euro. All bets are off.

I can think of several scenarios (all unlikely), all with different outcomes:
- Ireland leaves the Euro but not the EU - redenomination of savings, but not Euro loans, banks open the day after
- Ireland leaves both - redenominate all to punt nua, banks open day after
- Ireland leaves both and defaults on government debt, banks closed indefinitely

One of the most interesting options is to run a parallel currency, which will allow a country to guage the impact of leaving the Euro proper. Massive downsides to that however, you've tipped your hand.

Of your (allegedly unlikely) outcomes, by far the most likely is the first - that we would leave the German-euro and either move to a punt nua or a NGE but remain within the EU. That's the one I want to explore.

Why would Liam Byrne's example not apply? If assets were to be forcibly redenominated but debts remain in euro (be it rump euro or German-euro), then surely that is challengable legally? In other words, how could that be justified, since it seems logical that a change of currency ought to apply to debits as equally as credits?

hmmm

Cavehill Red wrote: »

Why would Liam Byrne's example not apply? If assets were to be forcibly redenominated but debts remain in euro (be it rump euro or German-euro), then surely that is challengable legally? In other words, how could that be justified, since it seems logical that a change of currency ought to apply to debits as equally as credits?

Because the forced conversion of deposits is largely within the competence of the Irish government - it will largely affect Irish people.

However, our loans (both public and private) are mostly funded from abroad, so it would put us in an international legal thicket. Judgements against "ireland" in foreign courts could cause unexpected problems as Argentina discovered - e.g. Aer Lingus planes might be seized on the ground when they land outside Ireland.

Cavehill Red

hmmm wrote: »

Because the forced conversion of deposits is largely within the competence of the Irish government - it will largely affect Irish people.

However, our loans (both public and private) are mostly funded from abroad, so it would put us in an international legal thicket. Judgements against "ireland" in foreign courts could cause unexpected problems as Argentina discovered - e.g. Aer Lingus planes might be seized on the ground when they land outside Ireland.

Just as well Aer Lingus is not state owned, then.

In the event that loans remain denominated in euro (or rump euro), then that presumably creates the precedent for savers to demand that their savings remain denominated in euro too, though?

amacca

Cavehill Red wrote: »

Just as well Aer Lingus is not state owned, then.

In the event that loans remain denominated in euro (or rump euro), then that presumably creates the precedent for savers to demand that their savings remain denominated in euro too, though?

It creates the precedent sure but imo that doesn't mean that the savings would be denominated in Euro were this to happen.

as mentioned before the deposits are irish citizens money (=> they can be converted to punt nua ..lower value euro etc).....whereas the debts effectively owed in euros to ecb, european banks etc and could remain denominated in euros as I understand it...as totally unfair as that seems....especially for someone with both who could see the value of their savings decrease and their debts increase in a single stroke.

Cavehill Red

amacca wrote: »

It creates the precedent sure but imo that doesn't mean that the savings would be denominated in Euro were this to happen.

as mentioned before the deposits are irish citizens money (=> they can be converted to punt nua ..lower value euro etc).....whereas the debts effectively owed in euros to ecb, european banks etc and could remain denominated in euros as I understand it...as totally unfair as that seems....especially for someone with both who could see the value of their savings decrease and their debts increase in a single stroke.

This final point is what I'm getting at. That is outrageously unfair, and of course benefits banks at the expense of the average citizen. Obviously one can hedge against such a possibility by relocating savings into other assets (currencies, whatever), but what possible hedge is there against having one's debts arbitrarily hiked, I wonder? Other than clearing them in advance, that is.

amacca

Cavehill Red wrote: »

This final point is what I'm getting at. That is outrageously unfair, and of course benefits banks at the expense of the average citizen. Obviously one can hedge against such a possibility by relocating savings into other assets (currencies, whatever), but what possible hedge is there against having one's debts arbitrarily hiked, I wonder? Other than clearing them in advance, that is.

I suspect it would not happen that way at all were we to turn our back completely on Europe.......................but that is exceptionally unlikely to happen imo and would mean our banks would probably collapse utterly and you would either have nothing in savings or a promise for our gvernment to get back a small percentage in the future or perhaps preferential entry to certain schemes to try and appease angry depositors etc (ultimately worth a fraction of what you lose if inflation etc is taken into account)

it could be a case that if we did leave the euro or were forced out then the value of private debts owed could be written down (as part of the negotiations , this could be dependent of course on just who they are owed to and could be a long messy drawn out frustrating fragmented affair for those caught up in it imo)

its hard to know what will happen I suspect however we will not get a chance to find out the above as either scenario will not materialize (at least for a long long time - famous last words i hope not)

as for hedges against your debts increasing...I hate to state the "bleedin obvious" (not being nasty there just self critical) but you need to invest in assets that will appreciate if you don't/cant clear the debts in advance...................choosing those types of assets with certainty in an unpredictable future is the trick especially when you cant be sure/fairly sure of exactly what the risk is you need to hedge against in the first place or how its likely to affect different kinds of assets...its all so interconnected and interdependent ....steering your way through it will require a lot of careful thought

back to basics for me.....diversify (within reason) spread the risk as much as possible across different assets classes that have a decent chance of at least not being wiped out.

Slydice

just remembered that mcwilliams has one side of it detailed in a recent blog entry:
Small savers will pay price if euro goes into meltdown
November 30, 2011
http://www.davidmcwilliams.ie/2011/11/30/small-savers-will-pay-price-if-euro-goes-into-meltdown
quote selected by me:

As a result, the central bank does nothing as the commercial banks experience a run on deposits. Bank runs happen quickly; that is why they are called bank runs, rather than bank ambles.

Here in Ireland, as savers’ money floods out of the country, the State will be faced with a choice. Does it allow this to happen or does it impose currency and capital controls to “lock in” money? We will not be the only country faced with this choice — all peripheral eurozone countries will be faced with the same dilemma as the citizens move to protect their savings.

Remember the citizens will be the last to “doubt” the banks. Shareholders have already sold, so too have bondholders, the final sources of bank funds are small deposits and, as always, they are the last to move. The big deposits moved a long time ago as evidenced by Siemens moving €6bn out of Soc Gen a few weeks back. This is a recurring pattern in financial history — the little guy always pays.

After the imposition of capital controls, the existence of the eurozone will come into question because it is hard to sustain the idea of a monetary union with capital controls. At this point, its strikes me that the most likely next move will be that the core countries, including France, will execute the plan they have been hatching for some time now, which is to move forward with a two-speed euro.

Cavehill Red

amacca wrote: »

as for hedges against your debts increasing...I hate to state the "bleedin obvious" (not being nasty there just self critical) but you need to invest in assets that will appreciate if you don't/cant clear the debts in advance...................choosing those types of assets with certainty in an unpredictable future is the trick especially when you cant be sure/fairly sure of exactly what the risk is you need to hedge against in the first place or how its likely to affect different kinds of assets...its all so interconnected and interdependent ....steering your way through it will require a lot of careful thought
back to basics for me.....diversify (within reason) spread the risk as much as possible across different assets classes that have a decent chance of at least not being wiped out.

That's actually hedging against savings losing value not a hedge against debts increasing in value.
So I repeat: is there a possible hedge against the value of one's debts, such as loans or mortgages, currently denominated in euro, increasing in the event that Ireland reverts to another currency but the debts remain denominated in euro or rump euro?
Is there a form of insurance or investment that would counter this?

hmmm

You can always rely on McWilliams to write something exciting and terrifying in his columns. Sells papers.

hmmm

Cavehill Red wrote: »

That's actually hedging against savings losing value not a hedge against debts increasing in value.
So I repeat: is there a possible hedge against the value of one's debts, such as loans or mortgages, currently denominated in euro, increasing in the event that Ireland reverts to another currency but the debts remain denominated in euro or rump euro?
Is there a form of insurance or investment that would counter this?

Sure, hold your assets in a country which retains the Euro or get a job in such a country.

Or else pressure Irish politicians to make sure we remain in the Eurozone.

Cavehill Red

hmmm wrote: »

Sure, hold your assets in a country which retains the Euro or get a job in such a country.

Or else pressure Irish politicians to make sure we remain in the Eurozone.

Again, those are hedges against the value of savings falling.

Am I being unclear in how I'm expressing myself?

If, in the scenario outlined, debts were to remain denominated in euro (or its replacement) while savings were redenominated into punts (for example), then we are agreed that savings would fall in value and debts would in real terms increase relative to earning power and the domestic economy.

Therefore, what I'm asking is, is there a possible hedge for exactly that increase in the cost of debt? Is there a form of insurance one can purchase, or some other method (perhaps transferring the currency the debt is denominated in beforehand, for example) that could be pursued?

amacca

Cavehill Red wrote: »

That's actually hedging against savings losing value not a hedge against debts increasing in value.
So I repeat: is there a possible hedge against the value of one's debts, such as loans or mortgages, currently denominated in euro, increasing in the event that Ireland reverts to another currency but the debts remain denominated in euro or rump euro?

In my world anything that gains value is a hedge against something/anyhing that loses value or indeed liabilities that increase in size

but I think I know what you mean..you want something directly linked to the debt rather than simply trying to make as much of your savings as possible to offset any possible increases in real terms in the debt.......so effectively you want something to either change the nature of the debt (not within your control unfortunately I think) or some way to insure the debt should you not be able to pay it as you mentioned in the rest of your post .......... I think if its a mortgage the debt happens to be and you have mortgage papyment protection it may not cover this as those policies typically only cover inability to pay through redundancy/critical illness imo...although reading the fine print is always advisable as the contract may have no mention of this (still though the insurance company itself could go under)............In short I dont think there is a hedge of the type you are looking for....for privately held debt at least (moreso for debt that has already been incurred)

but I am open to correction.

amacca

Cavehill Red wrote: »

some other method (perhaps transferring the currency the debt is denominated in beforehand, for example) that could be pursued?

I do not think you can do this...I stand to be corrected and please do not let me dishearten you but I do not believe this is possible...

it would also be a very risky hedge if it was possible as your debts could increase in value quite significantly if there was a two speed euro or euro break up

+what institution would let you redenominate your debts in zimbabwean whatevers for instance given they could be even more worthless next tuesday?

Cavehill Red

Yes, that's what I am driving at. One can hedge against savings falling by removing them from the arena and placing them in another currency, another country, another commodity than currency, any number of methods.

But how to hedge against debt increasing?

One obvious method is to expunge it. Grand. But that's not always feasible, especially in a mortgage scenario.

So, is there any other available method? Assuming payment protection insurance doesn't cover it, is there any other insurance product that might? A personal form of CDS, in other words?

psychward

why enter a second tier currency at all and be doomed to repeat the same mistake of giving up sovereignty and control over our own economy ? If the Euro collapses then why not just revert back to the punt ?

Cavehill Red

psychward wrote: »

why enter a second tier currency at all and be doomed to repeat the same mistake of giving up sovereignty and control over our own economy ? If the Euro collapses then why not just revert back to the punt ?

Given the nature of our economy, I'd rather see us re-enter the sterling zone than end up in a euro II currency with Greece and Portugal. However, that's not the topic of this thread. Assuming the euro breaks up, Ireland will not be alongside Germany using the DM or a strong rump euro. We will be using either a punt nua or a euro II substandard currency.

Either way, savings will fall and debts will rise (if they are not redenominated). I want to know what could be done to stave off the effects of the latter (debts costing more in the new currency because they are still denominated in the old one, or in a new rump euro we're not part of.)

swordofislam

Why would WE leave the Euro.
Let the Germans and the Dutch leave and set up the Starkeuro. Our debts will remain in Euro which will collapse in value.

The endgame should be to have the current Euro become the Greek currency so that our debts essentially go to zero.

Atilathehun

I understand, if you have €10k in the bank on deposit, and the government decides, or Germany decides for it, that we are out of the €, then the banks would be closed down for say a week, whilst our € are converted to punts, which would devalue very quickly. Say by 30%, leaving you with the equivalent of €7k in the bank. You have lost €3k.

Now, if you had that €10k under the mattress, when the conversion is made, it would not lose value at all!! You could walk into the bank one week after the devaluation, and buy 13k punts. That is you have lost nothing.

Does that make sense? I think it does.

swordofislam

Atilathehun wrote: »

I understand, if you have €10k in the bank on deposit, and the government decides, or Germany decides for it, that we are out of the €, then the banks would be closed down for say a week, whilst our € are converted to punts, which would devalue very quickly. Say by 30%, leaving you with the equivalent of €7k in the bank. You have lost €3k.

Now, if you had that €10k under the mattress, when the conversion is made, it would not lose value at all!! You could walk into the bank one week after the devaluation, and buy 13k punts. That is you have lost nothing.

Does that make sense? I think it does.

Germany cannot decide that Ireland should leave the Euro.
There is no guarantee that Irish citizens would be allowed to exchange Euro cash for punts on the same terms as German citizens.

Dont be at yourself

Would it really matter if the debts stayed in euro or were converted 1:1 to punt nua?

If the debts are converted to punt nua, the banks will presumably have to default on their foreign debts.
If the debts remains in euro, many of the already struggling Irish population will default on their debts, in turn caushing the banks to default on theirs.

SachaJ

Atilathehun wrote: »

I understand, if you have €10k in the bank on deposit, and the government decides, or Germany decides for it, that we are out of the €, then the banks would be closed down for say a week, whilst our € are converted to punts, which would devalue very quickly. Say by 30%, leaving you with the equivalent of €7k in the bank. You have lost €3k.

Now, if you had that €10k under the mattress, when the conversion is made, it would not lose value at all!! You could walk into the bank one week after the devaluation, and buy 13k punts. That is you have lost nothing.

Does that make sense? I think it does.

I would assume that any Irish issued Euro notes would be exchanged 1:1 to the new Irish punt.

Thud

SachaJ wrote: »

I would assume that any Irish issued Euro notes would be exchanged 1:1 to the new Irish punt.

yes but it is what happens after that that he is worried about. After a while it would end up as 2:1 or worse.

It wouldn't be in the countries interest to keep mortgages in Euro and convert savings to punts as mortgages defaults would increase.

What would need to happen is that Irish Sov and bank debt would need to be redenominated to punts also.
This would mean that banks borrowings would be in punts so they would be "happy" (who doesn't love happy banks??) to redenominate their lendings (the mortgages) to punts.

As punt weakened it would make Irish Sov debt relatively easier to pay off and that would be a benefit of returning to a punt.

Unfortunately the majority of irish people would then be paid in punts so relatively speaking (unless they have a lump of gold or German bunds or other hedge somewhere) their debt to income level would remain the same.....purchasing power would decrease and we would have to buy irish as exports will be extremely expensive

Joe 90

SachaJ wrote: »

I would assume that any Irish issued Euro notes would be exchanged 1:1 to the new Irish punt.

Yes, that's the way I would see it. That of course means the any country, not just Ireland, could drop out of the Euro overnight. No need for any advance printing of new currency or anything else which would give any warning.

The big question is of course as I live in England what happens if the Euro breaks up this weekend and I win the Euro roll over? Is the prize money in a German bank or a Greek bank? How many £s will I get?

Morrisseeee

McWilliams wrote:

This is a recurring pattern in financial history — the little guy always pays.

..........and because I'm the little guy, I'm now afraid !! Should I listen to McWilliams and do something (what, I don't know??) or should I just carry on as normal and hope I'm not screwed (or at least more screwed than I currently am) ?? Or should I wait and see what Enda says tomorrow night, and believe him ?? :(
There's the problem ^^, there's no expert there for the little man, because he's the last to know, he's left to turn the lights out.