What would happen to a Euro mortgage, if Spain dropped the Euro?

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29 Dec 2011 12:00 AM by BlazingSaddler Star rating in Bromsgrove, Worceste.... 11 posts Send private message

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I am currently in the process of buying an apartment from CAM bank, with the bank providing a 90% mortgage.

No one can say for sure, how the issues in the Eurozone will finally play out, but one possibility could be that Spain would return to the Peseta or a new currency which would devalue against the Euro which would then make Spanish exports more competitive and boost tourism.

If this new currency were to be worth say 30% less than the Euro, then are there any guarantees that the mortgage debt would also be converted into the new currency.

Otherwise property owners would immediately move to a position of being in negative equity.

Any thoughts on this?

Has anyone been able to get a guarantee of conversion to a new currency written in to their mortgage agreement? 

 

 



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29 Dec 2011 1:44 PM by bobaol Star rating. 2256 posts Send private message

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 There is still a fixed rate for the peseta against the euro of just over 166 pesetas to the euro. My bank statement still shows both rates, ie euro and peseta balance.

If Spain reverted to the peseta, your euro mortgage would be converted at that rate. Say, a mortgage of 100,000 euros would become 16,600,000 pesetas(ish).  If the peseta was then devalued then your conversion from pounds would mean you gain.  In euro to peseta terms it would be exactly the same.   





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29 Dec 2011 2:34 PM by johnzx Star rating in Spain. 5255 posts Send private message

If and buts. Might’s and maybe’s
 
If my sister were a man she would be my brother.  She is not so why should I be concerned about it.
 
Same goes for IF they change the currency.  I will be interested it what IS going to happen not what might or might not happen in the future !!!!





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29 Dec 2011 3:08 PM by Bri Star rating in North. 591 posts Send private message

 Now I admit just catching up with news now after a hectic Christmas - but unless I am missing something, none of the 'olive economies' collapsed over the Christmas period - so quite a few got that wrong!!!!

Ifs and buts cause a lot of worry and get you nowhere!!  



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29 Dec 2011 5:03 PM by davmunster Star rating in Carvajal\Belfast. 843 posts Send private message

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There are plenty of people wanting to discuss the possibilites. I am not sure why those who don't find the subject interesting keep posting on these threads.

BlazingSaddler raises a good point. Without commenting further on the likelihood of Spain leaving the Euro the following is my understanding of what would happen to a Euro Mortgage with a Spanish Bank if it does. The Euro amount would be converted to pesetas at the fixed rate as bobaol says. As the pesata will then be free to float and it's natural level (which would make Spain competitive again) is around 30% below it's current level the amount you owe and will have to pay will reduce accordingly - provided of course you are using GBP to service the loan.

On the other hand anyone with Spanish assets - including money in a Spanish bank will get less should they wish to take their money out of Spain after a collapse.



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29 Dec 2011 5:16 PM by Bri Star rating in North. 591 posts Send private message

 I think everyone with property in Spain is interested in what is going to happen.  The problem is that too many people think they know what is going to happen and enjoy a bit of doomsday spreading.  At the end of the day, worrying about it will not get you anywhere.  I have no idea what is going to happen - I know that my property in Spain may never regain the value it had in 2007 - but worrying about it is not going to get me anywhere.     



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29 Dec 2011 5:43 PM by davmunster Star rating in Carvajal\Belfast. 843 posts Send private message

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Fair enough Brian - I am in the same boat as you.

Buying a property now with a 90% mortgage does minimise the risk. I certainly would not think it wise to buy using my own money until we know what is going to happen which means that the uncertainty over the Euro is another negative for the already troubled property market.



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29 Dec 2011 8:11 PM by georgeh Star rating in condado de alhama sp.... 1462 posts Send private message

 it wont happen but if it does, borrow long and lend short because the peseta would collapse.



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01 Jan 2012 10:17 PM by BlazingSaddler Star rating in Bromsgrove, Worceste.... 11 posts Send private message

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Thanks for all your comments. All very helpful
Regards

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04 Jan 2012 5:10 PM by jandj Star rating. 1 posts Send private message

I think anyone with a Euro mortgage should be asking exactly this question.  To pretend that there is no chance of a Spain exit - or even a complete collapse of the whole structure - is the planning equivalent of sticking your fingers in your ears and going "lalalalalalalala!".  The fact that the Germans have been printing Deutch Marks for months now should be a hint! 

Of course it's a possibility; a very real one, and I for one am making sure I've worked out the implications and setting my stall out to mitigate the risk (or maximise the gain).

Looking at Spain's situation: 45% youth unemployment and 24% overall - you do have to wonder how else they are going to survive apart from defaulting and/or reverting to the Peseta and devaluing.  More debt is not the solution.  And if they do 'go it alone' I think a 30% devaulation is very optimistic; 50-60% seems more likely to me.

I think the outcome depends on your situation and objectives.  I have a relatively high mortgage to value (seven years of payments cancelled out by depreciation!) but I have long since given up on any hope of a profit from my investment.  Now my aim is to own my house at the smallest cost.  From that point of view I am keeping as little cash in Spanish banks as possible. 

The parallel question is this: what happens if the bank holding your mortgage... and therefore your deeds... collapses?  Not so sure about that.





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04 Jan 2012 6:28 PM by gcarton Star rating. 145 posts Send private message

In the highly unlikely scenario that your bank went bust, your mortagge would be viewed by the liquidator as an asset and sold accordingly. The better scenario is further Euro devaluation.

Guy





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04 Jan 2012 7:51 PM by Acer Star rating. 1457 posts Send private message

Standard & Poor's downgraded a whole load of Spanish banks last month.  There's been talk of recapitilisation but I don't believe it's actually happened, possibly just bluster.  The Spanish government keeps saying it will support domestic Spanish banks, but can they actually afford to do so ?   I don't know, I suppose it depends on the amount.  I just read the headlines and wonder if it's just wishful thinking on their part as their funds must already be stretched and surely there's a limit...

Apologies in advance to those that might label these comments as scaremongering.  But I'm just reacting to gcarton's "...In the highly unlikely scenario that your bank went bust..." which I found surprising.  I don't think many folk really know, but for sure there's cause for concern.



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14 Apr 2012 2:58 PM by evento Star rating. 33 posts Send private message

 O.K, Everyone is saying if Spain returns to the Peseta, its value would be approx 30% less than the Euro.

So if you live and work in Spain your Salary would be 30% less, so would your Mortgage be 30% less as well.

Is this the case, or am I missing something. As it stands with the Euro at the moment, we can afford nothing, the price of everything is going up, but the Saleries are staying the same, if you are lucky and have a Job.

I personally would love to see a return to the Peseta, you got so much more for your money and the Tourists were happy, and spending money in the bars and Restaurants.

I have lived and worked in Spain for 20 yrs, and have never seen things so bad. I really feel for trhe young people.





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14 Apr 2012 3:19 PM by bobaol Star rating. 2256 posts Send private message

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 Your mortgage statement (and bank statements) show the amount in euros and pesetas.  If (and a very big if) Spain reverted to the peseta, your mortgage would then be converted to the amount of pesetas shown.  If the currency was then devalued, the peseta cost would still be the same which would only make a difference to those being paid from outside Spain, pensions etc.  However, inflation would take a steep rise as most countries have found when they devalue their currency (witness UK when the pound was devalued from 3.79 dollars to 2.40 dollars under Harold Wilson, the pound in your pocket etc.)

And as to everything going up, I'm afraid this is virtually world wide.  Spain's inflation rate in March was 1.9% as compared to the UK one of 3.4%.  Even Germany had an inflation rate of 2.8%





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14 Apr 2012 3:42 PM by johnzx Star rating in Spain. 5255 posts Send private message

Bobaol
 
I may be a bit naive but I don’t believe if Spain reverted to the peseta, that they could devalue as they do not control the currency.  Surly the exchange rate is set by people who want or do not want to buy it.  That’s why exchange rates fluctuate.
 
Of course it would fall against say sterling, thus making it far more attractive for Brits to spend their holidays here and making Spanish exports cheaper. Imports would of course be more expensive.
 





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14 Apr 2012 8:23 PM by bobaol Star rating. 2256 posts Send private message

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 Countries devalue their currency all the time.  Britain did under Harold Wilson.  Spain did it to the peseta in 1973.  The reason for Spain pulling out of the euro (which I said is a big if) would be to take charge of their currency again.  This is totally different to market forces which can pull the currency down as well (or up again).  Governments devalue to make their goods cheaper abroad, unfortunately it tends to drive prices in the home country up but it is hoped that the increase in cheaper exports would balance it out.  An example of a currency devaluing is, as I said, Harold Wilson devaluing the pound  by 14% in 1967 which was a goverment devaluation.  The market rate was $2.80 to the pound but he reduced it to $2.40.  Market forces then devalued it even more (which is what happens when markets lose confidence in a currency even though the original reason was to make it more realistic).  In 1976, market forces pushed the pound down to almost parity with the USD (1 to 1.06) and inflation in the UK was running at 23%.  

An extreme example is, of course, Zimbabwe which has devalued it so much than 1 US dollar is now work 60,000 trillion Zim Dollars (I think I've got that right, 60 and 15 noughts).  Mexico and Argentina both government devalued their currencies last year.  Brazil has a good idea, though.  When the trade deficit gets too high, it simply changes the currency so the old money is not worth as much (for example, the Cruzeiro  was replaced in 1986 with the Cruzado which was worth 75% of the old Cruzeiro but prices remained the same in the shops, effectively devaluing the currency by 25%.

There would be no point in Spain exiting the euro if they did not regain control of their currency.  

 

 


This message was last edited by bobaol on 14/04/2012.



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15 Apr 2012 11:41 AM by johnzx Star rating in Spain. 5255 posts Send private message

If Spain reverted to the peseta, I still believe that market forces would determine its value against other currencies. Of course the Bank of Spain could intervene to buy to maintain the rate or sell to reduce it, provided it had the funds.
 
The peseta in the 10 years or so before the adoption of the Euro floated between, 165 to 270 to Sterling.   That was dictated by market demand not the Bank of Spain.
 
Sorry if I am being obtuse.
 
 
http://tutor2u.net/economics/content/topics/exchangerates/fixed_floating.htm





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21 Apr 2012 12:38 PM by gledeknowe Star rating. 2 posts Send private message

Agree that its a big 'If' but I would guess that if Greece is finally recognised as being in default and reverts to the Drachma, the other PIIGS countries will start to follow. So...all the debate is about mortgages but, I am in the situation where I've been in dispute  with the builder for some years and  have not yet completed.  If Spain did find itself having to revert to the peseta, from the preceding discussion, I presume that the balance required to complete would be converted to pesetas and drop in value (therefore cost to me) as outlined above.

Having said all that, I guess if the Euro starts to fold, the propert market in Spain might be the least of our worries!





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21 Apr 2012 12:54 PM by DonLochnagar Star rating in Mazarron. 161 posts Send private message

Get as big a mortgage as you can in Spain and keep your cash in the UK, would be my advice.





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21 Apr 2012 4:45 PM by Chopera Star rating. 16 posts Send private message

If Spain left the euro it's new currency will devalue. Central banks have a high level control over currency values relative to other asset classes by controlling how much of that currency is in circulation, and markets also influence currency values because that is where the currencies are actually exchanged for other assets (or other currencies)

And if Spain did leave the euro then it would be overwhelmingly in the Bank of Spain's interest to devalue (otherwise there wouldn't be much point in leaving the euro!) not just to improve the existing tade imbalances, but also to devalue all existing debt, both public and private. And that includes Spanish mortgages.

 

By the way, mortgage statements showing amounts in pesetas are only there for comparison purposes. It is based on the exchange rate between the old peseta and the euro when the euro took over in 2002. That peseta no longer exists as a currency - you can no use it as legal tender and you can not exchange it for other currencies on the forex markets (although you might still be able to exchange old notes and coins for euros in a Spanish bank). If Spain left the euro there is no reason whatsoever to think the Spanish government would use the same exchange rate as it did when the old peseta was phased out. It might "re-introduce" the peseta but that would be in name only. More likely it would reintroduce the peseta at a one-to-one exchange rate with the euro and then start devaluing it by printing.





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