Mortgages and return to the peseta

Apologies if this has been discussed before but I couldn't find any threads and I'm new to the site!

I have a mortgage in Southern Spain....approx 150k left on it.

If all fails with the Euro bailout and Spain returns to the peseta, what are people forecasting will happen?

Is it better to try and sell for a huge loss now, or to sit tight?

If we all knew the answer to that we would all be too rich to be posting here !!!!

As John says - other than being too rich to post! He is quite correct that the mortgage will be converted to pesetas at whatever the official rate is on the day of conversion back to Peseta (what specific legislation is you would need to ask the ECB but there is still an official conversion rate to pesetas that was applied when the peseta was phased out so it is even possible they would use that historic rate).

Personally I think it likely that if this does happen and the Euro fails there will probably be more to worry about all round other than Spain specifically but there would be a very real possibility that Spain would go through one or more devaluations - this means your £ would buy more Pesetas and thus your mortgage in effect cheaper.....Other side of the coin is that at point of sale any sale proceeds would have to be converted to Sterling to take back to the UK ....... therefore buying you less £.

It was 166.385 pesetas to the Euro on 'Euro Day' 2002

As I intend to send the rest of my life in Spain, if my UK pension goes up I don't care what happens to the value of my house expressed in sterling terms.

Perfect philosophy John

 ... but not necessarily a transferable philosophy!

I'm thinking of a purchase at bargain rates in Murcia, to be rented out for several years.

There is a possibility that the asset could be valued in the national currency and the mortgage could remain in Euro's.

ie id Spain left the euro, but the banks had euro loans, the loans would stay in euro's and all holders of those mortgages would have thumping day-1 losses dependent on how far the new national currency fell against the euro.

I am searching for "insurance" against this event, possibly a one-off payment that would cover the "gap" amount, thus if my 100k euro asset got converted into pesetas and was revalued at 75k at prevailing exchange rates, the insurance company would cough up the difference.

sort of life insurance for the euro!

Not sure the banks would be able to do that Jon. If there is a conversion back to Pesetas but the mortgage remains in Euros - if the Euro should disappear entirely how do you pay it or redeem it if there is no Euro currency? I doubt that Spain will leave the Euro as a single entity - it could happen but unlikely.

Add to that the problems with balance sheet if the bank's normal currency is Peseta but it has huge domestic liabilities on its books that are assessed in Euros. With the amount of toxic debt the banks are holding I doubt they would sign up to that anyway.

As to an insurance product; I am not aware of one to cover that risk and to date you are the first person I am aware of that has ever mentioned it. Insurers will only invest in development of a product if they think there is sufficient ongoing demand......this scenario would be perceived a "blip" problem so I dont think they would ever look at it - if they were to, then the risk factor for them would be massive for one moment in time, so I suspect premiums would be so high as to discount any probability that the masses would buy it - or in order to keep premiums competitive they would limit the downside risk to a specific amount of say 10,000 currency units (Euro or Peseta - take your pick).

Scenario:

Banks borrow in Euro's to fund your mortgage. The bank you borrow from may be spanish owned or may not.

If the currency was redenominated to be Peseta's there's no guarantee the mortgage, (which may be ring-fenced as a euro loan, and chopped up and resold to other banks), would be converted to Peseta's.

The Euro won't disappear, it may however be a northern-Europe Euro, not including Spain, Greece and the rest of the late-payment gang. (I don't take a moral view, just a practical one, I personally think the Greek people should tell Germany where to stick its conditions, and devalue post-haste...)

So with the Euro still existing but Spain out of the Euro zone there would be a situation where the CajaMurcia, for example, (don't want to start a run....) has borrowed from the Euro fund or German Banks to supply you or me with a mortgage and owes in the Euro currency. The loan will be written such as it remains in Euro's.

Thus, when (if) the Peseta is re-instated, your loan, which is written and funded in Euro's remains in Euro's. Sadly the value of your asset is denominated in Peseta's, the cost of your mortgage is written in Euro's.

Actually I think Greece leaving the euro is a certainty. Spain much less so, it would be a body blow to the Euro, and some kind of compromise will be reached.

 That's like saying the mortgages bought by British banks from the American market should have been charged in pounds.  They didn't, they stayed in dollars for the Americans.  Likewise, many American companies bought UK mortgages but they stayed in pounds, not dollars.  Believe it or not, people would have taken out mortgages in pesetas.  It didn't stay in pesetas when Spain converted to the euro, they were changed to euros.  OK, this might be slightly different as the peseta disappeared (although mortgage and bank accounts still give the equivalent in pesetas) but I can't see any situation in which a banking system, should it revert to a national currency, would charge in what will be a foreign currency.  The vagaries of the exchange rate would, for one thing, put the whole thing awry.  With all the things to worry about in the financial markets, making up problems which won't happen will make everyone's hair go even greyer.

(Which reminds me, when I used to go the barber I'd say just cut the grey bits out and I'd end up with a perfect haircut.  If I did that nowadays I'd end up looking like Duncan Goodhew)

If this happens the expats who have overseas income may be OK, but investors and the Spanish will have a lot to worry about for a long time to come. It might lead to not being a good place to be for the expat with money and the locals who have less as well as growing unemployment.

lets hope it's sorted as it looks like Southern Europe may have some bleak years ahead what every the outcome of Spain and the Euro.

Bob - had to laugh at your Duncan Goodhew reference......quality! But an excellent post in terms of bringing it down to basics and I think its bang on the money.

Jon02000, while I think it extremely unlikely your scenario would or could happen, I guess the only insurance you can get is to wait until we all know the outcome of the Eurozone experiments ultimate success or failure. If you think it warrants the risk then buy now at bargain rates if not then wait until there is more certainty - the only person that can decide that is you. How would you structure a rental contract in the event that reversion takes place in the middle of a tenancy - Euros or Pesetas? I am going to ask a lawyer if they are aware of anything in the statute books that allows for this scenario, but at the same time perhaps you should ask your local MEP. Its rare they do anything constructive for their money so this problem might give him/her some value.

As to DBS, I think we can all get one thing straight. Spain's economy is royally screwed. South or North. Among the Spanish the pain is perhaps being felt more in the North owing to density of official population. At the same time the North is better placed to recover as there is much less dependence on tourism and there are real industries and businesses to contribute to GDP.

However official statistics show that unemployment (especially youth) is higher in the south. I couldnt comment on how much of this is real and how much of it is negated by the black economy but rest assured there are more working than statistics have us believe. Albeit they may be on breadline earnings but the Spanish arent afraid to get their hands dirty to make ends meet.

All types of crime have been and will continue to be an issue on the Costas - wealthy or not. The Spanish are just as much victims as anyone else and there are plenty of very wealthy Spaniards to prey on - the one thing I can agree with 100% is that Spain definitely has a lot of bleak years ahead........but while the numbers are way way down, people still continue to buy here and continue to holiday here - maybe not in the same numbers from the UK or Ireland but Spain targets a much wider and more cosmopolitan audience these days. Markets are cyclical and one day (later rather than sooner I feel) the south of Spain will be back

this is from an Oirish financial forum where the "what happens to my mortgage if the currency changes" question has been exercising minds 

this paraphrases what I think may happen.

My take on it is that as your Mortage is borrowed from the bank, and the bank have originally borrowed this from the Bond market in (original) Euro's, your bank would have to repay Euro's to the Bond holder, and so you would have to repay Euro's to your Bank. (Or the equilivalent Value when it would be converted to Punt or Euro - Lite) This conversion rate would determine whether the value of your loan increased or decreased over time, depening on the exchange rate movements consequently.

Assuming Spain leaves the euro block, so the euro still exists for big parts of europe - In the case of a re-introduction of the peseta, with a fall of say 25% against the remainder of the euro block the banks may apply that exchange rate to your mortgage if they wanted to convert it to peseta's. 

However they could still just insist on payments converted to the euro rate. So if you were paying 400 euro a month, then you would still pay 400 euros a month, but converted to peseta's at the prevailing exchange rate. 

Then again an outright "default" could mean that the bank doesn't honour the bonds in their original format, and if the bondholders take a 50% haircut, the ever fair bank would pass that on to you. Wouldn't they. 

To be honest it has all the predictability of the roulette table. Place your bets!

Thats in Ireland Jono. Spanish mortgage law dictates that all mortgages are borrowed from the Bank of Spain (albeit branded with the individual lenders name, terms and conditions etc) - you are in effect borrowing from the Bank of Spain. Many years ago Spain outlawed comnplicated arbitrage and compex financial instruments such as swaps owing to the collapse of 2 relatively major banks. In essence I dont believe the bank you would borrow from would be impacted by the bond market therefore not subject to the same constraints.

Having spoken to a lawyer she is not aware of any pre-existing statute (nobody in Government anticipated failure of a single currency - they must have been mad in my view but what do I know) to cover this. However what she did say is that Spain has a track record for ignoring conditions imposed on it by the EU that Spain felt was counter to its own best interests and that Spain would always fight to protect that which lay within its borders. Not that Spain has any favouritism towards mortgage borrowers but if the rule applies it will be across the board and will impact negatively on way more Spanish than non residents. A country that is to all intents bankrupt would be financially penalised even more - she cant see Spain accepting it - even if it meant leaving the EU.

As you say - its eyes down and place your bets but only you can decide.

Dear All,

if Spain will not behave as EU and Merkel will not accept Spain doing it's own thing regardless, surely there is nothing to bet on, the yanks are right and disintegration is definite.

Regards

Norman

Hi All, All points taken and could be debated  into infinity; However, noone has said what will happen to the pound, everyone's assumed it will stay level being out of the eurozone but as Europe is it's largest export market at present it coulld be hit with some pretty heavy fallout. The other aspect unmentioned until now is that if Spain reverted to the Peseta and devalued at the same time there's no doubt in my mind that interest rates would have to increase to help with the Spanish recovery. A weaker pound coupled with higher interest rates would not be good news for all the Brits with sterling income and a spanish mortgage. As always it looks like us poor mortals can only sit back and hope that there is an intelligent politician (I'm sorry that's a contradiction in terms!!) out there who can resolve this issue. Or more likely we could all be beamed up by aliens!! We watch and wait. Regards

If Spain reverted to the peseta one thing is sure, the spending power of the Pound will improve against it considerably.

It's very difficult to know what the banks would do if Spain leaves the Euro. The precise behaviour of cornered rats is unknowable but it's almost always unfriendly. 

If it happened, I think the old conversion rate would be irrelevant. More likely we'd see a New Peseta - initially close to parity with the Euro. That would screw the old Pesetas under the mattress which would be redeemed very quickly for whatever morsals the prevelant (Old-to-New) exchange rate permitted - if any. 

Historically,  when such a thing has happened, inflation, and even hyperinflation, follow very quickly because the government are now back in charge of the printing press and will use it to reduce the debt and to fund itself. 

As mentioned by others, this would benefit anyone whose income is derived from overseas but for anyone whose sole income is from within Spain, it'll be very tough. 

The banks know this will happen. So, my guess is that they will keep all existing mortgages in Euros. To not do so will see them suffering even greater losses as the New Peseta value of the property moves a little - but the 'real' value is ravaged by inflation. 

This is only one way that debt deflation is resolved. Mathematics makes it a certainty. Only the form is unknown. It's very painful initially but as in Argentina, a more stable 'normal' does return.

 What we're experiencing now with the clowns in power is death by a thousand cuts - which increases to many thousands of cuts and then millions every time they try to avoid the inevitable by layering on even more debt that can never be repaid. .    

Hi Patrick,

is that possible?

if the mortgage is with the Bank of Spain can they keep it in Euros?

or will it be only the overseas mortgagees?

sounds like something of a mess.

Regards

Norman

As always JD a well considered post and I particularly like the reference to cornered rats as it is a very good reflection of where we stand now.

The one element (albeit unpredictable) I might be at odds with is the view that mortgages will remain in Euros. Ultimately it doesnt matter what currency the banks want, it will be down to the Statute books and those that plan the exit strategy to decide ...... i.e. those in power. I am not sure Rajoys lot are any better or worse than the headless chickens in the previous govt. The Spanish people are more inclined than Brits to demonstrate their dissatisfaction - if all of a sudden their very diminished income is diminished further still by having to pay a mortgage which is in effect a foreign currency there will be widespread revolt. Banks here get penalised by the Bank of Spain for mortgage defaulters ....... I am inclined to think this more likely to cause a further banking crisis than if the banks were to maintain the status quo.

Furthermore laws everywhere are influenced by precedent. While there is no precedent for exit from a single currency Peseta mortgages were arbitrarily converted to Euro mortgages at convergence so I suspect that precedent would be considered in the courts - and believe me there would be a massive lobby in the courts if this "precedent" was not applied.

Its a crystal ball situation but one thing that is sure is that the Spanish have a tendency to "blind spot" when it comes to thinking about consequences.......if you have ever had to deal with bureaucracy here or even simply followed a diversion on the roads then you will know what I am talking about.

Hi Norman - it is without doubt a mess. It surprises me a little that Spanish banks have been permitted to sell debts to overseas lenders ....... considering the controls the BOS likes to retain on lending. While I am not able to state this as fact as I dont have priveleged information to bank records, subject to how they have been packaged up and sold it is even possible that Spanish banking laws have been broken....... after the Barclays UK LIBOR scandal anything is possible...... banks here have historically been less supervised than in the UK......

I feel perhaps that the BOS will take the view that those loans now maintained outside Spain I believe will be considered the problem of those lenders outside Spain......not within our borders not our problem! However the "asset" is within Spain...the payment is made within Spain therefore it should be in Peseta.

As I said previously if only I had crystal balls!