Why does nobody know what will happen if there is a euro break-up?

monkey8 · 25-07-2012 07:33PM #1

Why does nobody know what will happen if there is a euro break-up?
Nobody for example seems to know if debt such as mortgages will have to be paid back in Euro's or the new currency.
Even the European "experts" in the RTE programme about it a month or so ago didn't know what would happen.
I realise this exact scenario has never happened before but someone must know what will happen.
I'm sure contingency plans are in place now so why can't we get definate answers as to exactly what will happen?

NIMAN · 25-07-2012 07:37PM

I think they never thought it would happen, so didn't make any plans for how to handle it.

I'm no economist, but I would guess that your debts/mortgage/savings would simply be converted into whatever new currency your country started to use, based on a given exchange rate v the old Euro?

Tea drinker · 25-07-2012 08:43PM

NIMAN wrote: »

I think they never thought it would happen, so didn't make any plans for how to handle it.

I'm no economist, but I would guess that your debts/mortgage/savings would simply be converted into whatever new currency your country started to use, based on a given exchange rate v the old Euro?

On the face of it that would be an unpayable mortgage as the new local currency would be devalued to increase competitiveness.
OTOH Our euro departure may include some nuking of banking and or soveriegn debt . You might be paying back in local currency to an Irish state bank.

Pure uneducated guess mind you.

johnnyskeleton · 25-07-2012 09:44PM

1. No one can predict what will happen with absolute certainty ever. So asking what will happen and expecting someone to give you a straightforward answer is like asking which country will win the most olympic gold medals and then getting upset that people have different views and no one can say for certain.

2. People do know what would happen in the different scenarios in broad terms, but there are a dozen different scenarios. Your question is not specific enough to give a specific answer. Apart from anything else, governments have massive discretion as to what laws they pass an international institutions likewise can make whatever rules they like.

3. In relation to mortgage debt, if the euro breakup means that the euro survives in one form or another, the mortgages will have to be repaid in euro unless legislation is passed to permit debts to be discharged in another currency.

4. International debts will remaindenominated in euro unless the country in which the contract was made has legislation to the contrary.

5. Equally, however, ron Paul could become king of Europe and replace all currency with gold. No one can predict the future.

Chris_5339762 · 26-07-2012 09:44AM

If everyones mortgage suddenly doubled (due to pegging to euro and a Punt Nua collapse) then probably 80% of the mortgages (guess) would be in negative equity the next month. The banks couldn't repossess all those houses anyway.

If it was pegged to the Punt Nua, then people could pay and the euro value of private debt in Ireland would collapse. Not as bad by any means and to me, the logical solution.

antoobrien · 26-07-2012 09:56AM

monkey8 wrote: »

Why does nobody know what will happen if there is a euro break-up?
Nobody for example seems to know if debt such as mortgages will have to be paid back in Euro's or the new currency.
Even the European "experts" in the RTE programme about it a month or so ago didn't know what would happen.
I realise this exact scenario has never happened before but someone must know what will happen.
I'm sure contingency plans are in place now so why can't we get definate answers as to exactly what will happen?

Assuming we revert to the former currencies it will probably go something like this:

Loans will be converted the national currency of the originating company e.g. Ulsterbank (RBS) will be in sterling, NIB (Danskebank) will be in Krone, ACC (Rabbo) in Guilder etc. Then the exchange rates will apply to the loan and repayments will be made in the local currency. This is already done in various places across Europe where you can take out a loan in a foreign currency (I know a Polish guy who took out a Swiss Franc mortgage, thinking it' be cheaper than a Zloty one - a couple of years later he wishes he hadn't).

What will be trickier is the Irish banks - the majority their funding is not Irish but the loans are. My guess here is that the banks will have to hike interest rates (welcome back to the 80's and 90's) to cover the exchange rates.

Joe 90 · 26-07-2012 11:10AM

Chris_5339762 wrote: »

If everyones mortgage suddenly doubled (due to pegging to euro and a Punt Nua collapse) then probably 80% of the mortgages (guess) would be in negative equity the next month. The banks couldn't repossess all those houses anyway.

If it was pegged to the Punt Nua, then people could pay and the euro value of private debt in Ireland would collapse. Not as bad by any means and to me, the logical solution.

Most likely correct but you forget one little thing. Interest ratea in the Punt Nua zone are going to be a helluva lot higher than in the Euro zone.

Just tripped over an old, 1990, advice of interest rate change from the building society. Interest rate changed to 14.4%. Thats here in the UK.

ardmacha · 26-07-2012 12:09PM

Ulsterbank (RBS) will be in sterling,

I can't see how a Euro loan can turn into a non Euro currency loan or indeed how subsidiary banks can just impose some other currency.

View · 26-07-2012 12:28PM

monkey8 wrote: »

Why does nobody know what will happen if there is a euro break-up?
Nobody for example seems to know if debt such as mortgages will have to be paid back in Euro's or the new currency.
Even the European "experts" in the RTE programme about it a month or so ago didn't know what would happen.
I realise this exact scenario has never happened before but someone must know what will happen.
I'm sure contingency plans are in place now so why can't we get definate answers as to exactly what will happen?

The contingency plan is "Fix the Euro".

The politicians aren't planning for something they have no intention of letting happen just as our own (domestic) politicians have no contingency plans for us to re-join the UK because our state's finances leave a lot to be desired at the moment.

antoobrien · 26-07-2012 12:34PM

ardmacha wrote: »

I can't see how a Euro loan can turn into a non Euro currency loan or indeed how subsidiary banks can just impose some other currency.

Right now there's nothing to stop it from happening. The only reason loans are given out here in Euros is because it's impractical to try to do business in Sterling, Krone, USD etc as the customer will have problems converting the money to euro to pay for goods and then raising foreign currency to pay the loan. So lenders convert the principle to Euros and customers pay that. Interest rates are higher here because of the source of funds being mostly non-euro funding (to cover exchange rates).

A former colleague of mine moved back to Poland a couple of years ago. In preparation for doing that he took out a loan to buy a property. Not in Euros or Zloty but in Swiss Francs - with the repayments to be in Zloty. Now a few years later the laon is more expensive than he though it would be and he's stuck paying off the Swiss Francs i.e. the source of the loan.

The banks are going to enforce something like this if the euro breaks up.

bbsrs · 26-07-2012 12:50PM

Joe 90 wrote: »

Most likely correct but you forget one little thing. Interest ratea in the Punt Nua zone are going to be a helluva lot higher than in the Euro zone.

Just tripped over an old, 1990, advice of interest rate change from the building society. Interest rate changed to 14.4%. Thats here in the UK.

What would happen to an Irish mortgage that tracks the ECB rate?

Is it nobody knows what will happen or nobody is saying yet?

seamus · 26-07-2012 12:54PM

I would suspect in most cases the break-up of the euro would be signalled some time in advance and parliaments would have time to put through the emergency legislation.

The legislation required to legalise a "punt nua" would likely also require that all Irish accounts - current, loan, mortgage, etc - which are in euros must be converted to Punt nua. This would prevent banks from forcing people to hold sterling mortgage accounts, and so forth.

The end result would be the same in any case and overnight everyone's savings would plummet in value while their repayments on all debt skyrocket.

I'm sure contingency plans are in place now so why can't we get definate answers as to exactly what will happen?

I wouldn't be sure of that. Have government ministers privately discussed it amongst themselves? Absolutely no doubt. Have they created and formal plan and put it on paper? Not a hope in hell. Any evidence that any of the eurozone governments had actual solid contingency plans written down would be taken as a sign that the eurozone is doomed and that would be the end of that. Tell the world that you're planning for the worst and it becomes a self-fulfilling prophecy.

The closest thing we had was a claim at the end of last year that Germany were printing marks, but this appeared to be an erroneous quotation of an American economist who stated she believed that Germany were printing them, despite having no proof of that.

Why does nobody know what will happen if there is a euro break-up?

Comments