Mortgages and return to the peseta

Smiley wrote: "Many years ago Spain outlawed comnplicated arbitrage and compex financial instruments such as swaps owing to the collapse of 2 relatively major banks."

That is correct. They were outlawed from dealing in exotics - directly.  

What is unknown is how much exposure and counter-party risk they have in emerging markets - predominantly in South America where they have significant subsidiary operations but where no such legal restrictions applied. 

That exposure is unknown but was cited as a reason for Moody's downgrade of Spanish banks last week.

As Buffett once said: "No one knows who's swimming naked until the tide goes out".

Smiley, I agree. There will be as much force demanding that mortage debt be converted to the new currency as there will be for it to remain in Euros. I have no idea who will win that war. I just instinctively know that the banks will do whatever they can to avoid losses, which they will incur if the outstanding debt is converted. 

As you know, having a mortgage in a different currency to the nation's in which the property is located is unusual but not new. It'll be a messy process either way. I guess if that mess can be made to appear insurmountable by the banks, that would be more grist for their next bailout request mill.

Hi JD - they didnt need to go to South America - I used to be an Interest Rate Swaps and off balance sheet instruments broker in London in a former life - they were using London branches to trade after the regulation went through. I think they had to tone it down a little but it still went on based on what the eye doesnt see.......Nonetheless if the debt has left Spain to South America it is outside Spain ...... whether it be in the branch network or not and the people (who will I believe be the driving force) will say its not domestic, therefore not our problem.....and if Argentina and Brazil can screw us with Repsol why should we worry if they have Bond debts with a currency exposure risk ..... they are dogmatic if nothing else.

I agree with you the banks will be bitching but personally I dont think the banks would get their way. BOS I hope would stand its ground and forgive the cliche "goes in Spain stays in Spain" . "You guys took the risk - not your customers its your problem to resolve...... you're the ones that circumvented the rules to suit your book."

....the people have already given a lot and I think this would be the straw to break the camels back.

Hi everyone.

I'm with johnzx (& others), as my income is dervived from UK and I don't really care what happens - sympathy, like charity begins at home.                   I certainly cannot sell either of my two properties (well, possibly I could if I asked  for 1/4 of what I paid), and the supply of tenants have also virtually dried up. 

Forerign owners on urbanisations are coming out for a holiday less and less frequently: the appearance of most urbanisations are going down the shute: : the care and maintenance of once-immaculate gardens & swimming pools is being binned on cost grounds, the number of debtors for urbanisation fees is going through the roof - with the inevitable mega impact on the ones who do pay, and the recession is really affecting virtually everyone.

Re-possessions, and worse, the surrender of keys, once virtually unheard of, is now an option discussed by many people who originally never even gave the subject a thought.           Spain hasn't even seen more than the tip of the iceberg.   That's my (depressing) assessment.

But I do not see how a mortgage could be retained in euros if Spain does leave the EU.  The economy would revert to (presumably NEW) pesetas, and as regards any future mortgages, the banks would effectively be operating a two-tier and a two-currency system.           Let's' face it, they now have considerable difficulty in coping with the management of a one-currency system, and potential losses which are effectively underwritten by the government.

Germany having now been stuffed by Italy in the "kickball" competition may result in Germany being less than enthusiastic about bailing anyone out.   How long before the average "Hans" revolts against his standard of living being eroded by funding the Countries who so blithely and irresponsibly disposed of his taxes.

If Spain does opt out, or is forced to, then revaluation has to be on the cards: if they were anywhere near solvent as a Country, there wouldn't be any talk about them possibly leaving.

Th banks haven't a clue about how to cope with their colossal loss-making property portfolios now: if they also had to cope with a new currency AND a devaluation, they'd be even further up that well known Creek.

My personal opinion is that foreign underwriters of these banks would want their money back in euros (effectively what has caused this crisis) and Spain would have to do whatever was necessary (which could possibly include just ignoring them) to repay - putting the currency printing presses ona 25 hour day could be a possibe start..

If there's any Brits out there who were alive & kicking in the early 1970's - UK had the same: problems: inflation around 20%, mortgage rates around 16%, strikes every hour on the hour (including no electricity during certain hours in certain areas every day for months) and in general, years of general misery all round.

Hi JDOI

In a previous life, I worked for one of the major lending institutions in the UK.

Traditionally (ie. before they got too greedy) banks & building societies charged 6% for mortgages, and paid Investers 3%.   What theyt took in as investments, they lent out as mortgages.   The 3% difference paid their operating costs, and all was hunky-dory, and everyone knew where they stood, and were happy.

Then these people discovered that they could borrow their money from USA - ar perhaps 1.5%.   Great, yet a further 1.5% profit,   No need for wooing investors, so they could drop their rates down to 1% with impunity.

All was great whilst the US were continually rolling over their loans, but when they hit hard times and said, we want our money back, then (as in Norther Rock) it was "panic" (and time to go bumpety-bump) time.    Billions were locked up on long-term mortgages, but it was those same Billions that had to be repaid immediately.

The banks never learn - money borrowed has to be repaid eventually. 

Smiley, 

Yes "What goes on outside Spain stays outside Spain" is another euphamism for defaulting on debt obligations.

That has always been an option. It always will and I don't dispute that. So far, it's an option that's only been taken by Iceland.

What I was addressing was the idea that the Spanish banks are not exposed to exotic financial instruments because a law was passed that prevented them from trading them. That is not the case.

The restriction only applied to direct trading - not via their partially or wholly owned subsidiaries - or the sleight of hand that you witnessed. 

As I said, I agree that they could just default if they, as ultimate counter-parties, are on the hook. But a default is a default.

It doesn't much matter whether a law was passed, 'supposedly' preventing such debts from ever occurring from transactions within in their own country only for them to be assumed via overseas conduits. The obligation is exactly the same. Only a highly subjective 'what's outside Spain stays outside Spain'  moral code permits a mindset to default on one type of debt (overseas) - but it has no legal validity. They are still on the hook - despite the laws that were supposed to prevent such exposure.      

We can only guess how they will deal with those obligations if/when they arise - and far more importantly, what they will be allowed to do by forces far greater than the Spanish people or its Government. 

While I'm firmly in the camp that everyone should default and allow for a complete Global reset, that has enormous consequences - the pain from which most people are ill-prepared. 

As Greece has discovered, the middle finger solution is not going to be without immense pain. Greece threatened it many times and most people thought that such a proud nation would stand firm - but she caved-in instead - quite meekly in the end. 

So, I'm not sure that I share your confidence that Spain's initial chest-thumping will ultimately prove to be any less phony.    

Spain may or may not be forced to leave monetary union but that's not to say they have to leave the EU

Surely in simple terms if you owe 150,000€ you would still owe 150,000€ - if they set a conversion rate prior to leaving the euro of lets say parity, so 1 euro would equal 1 new peseta of course we all know what will happen then - as soon as the new currency is traded it will devalue against the rest of the world.

So the effect of this will be unchanged by the rest of Euroland, GBP and the rest of the world will have to find less of their national currencies to service the same debt. As Smiley said the only ones that will suffer will be the Spanish and those earning in the new currency.

One things for sure the BOS will not be letting anybody off paying what they owe - As you say Norman, a right mess

finkies: [But I do not see how a mortgage could be retained in euros if Spain does leave the EU.  The economy would revert to (presumably NEW) pesetas, and as regards any future mortgages, the banks would effectively be operating a two-tier and a two-currency system.]

It's nowhere near as difficult as you seem to think. It's just another cross-currency transaction in the Ledger. Many $Trillions of such transactions occur daily. The extra processing required from once-a-month mortgage payments in Spain wouldn't even be noticed by the super-computers that do that processing. I'm not saying that this is the route they'll choose - just that it isn't difficult from a processing standpoint nor would there be a two-tiered currency system.  

The far, far greater threat to such a decision is the resulting civil unrest, that Smiley touched upon, amongst the people trying to pay a mortgage held in one currency with another, rapidly weakening, currency. That is what will prevent it IMO - not the "considerable difficulty in coping with the management" of such payments -which would be a mere blip in terms of automated processing. 

People are just waking up to what might happen to Sterling should the Euro problem(s) remain for much longer. It may escaped notice that the UK has been steadily devaluing Sterling for a while and is making noises that this will continue for the medium term.

When we sold our properties in spain and the UK we were expecting to take the funds back to Oz when the rates improved - as of Friday we still held the funds in Sterling and Euros. Since we like the UK and wanted a base here we have purchased a house in Oxford which took care of some of the Sterling. After meeting our advisers on Friday we have moved all our Euro funds from the Spanish Bank and converted them and the remaining Sterling to US dollars we will also be converting the AU dollars resulting from the sale of our Perth (Australia) home to US dollars.

It would seem the the Euro and Sterling, certainly from a cash perspective, are not seen as a good bet and I suspect that should Spain pull out of the Euro with the difficulties that will cause for the rest of Europe the UK will be as hard hit as the Euro members and the deval that Spain would undertake might well be the route all of Europe has to take what ever currency is in use.

Off to the Tennis.

David

TeamGB,

[Surely in simple terms if you owe 150,000€ you would still owe 150,000€]

If that holds true, then it is inconsistent with......

[the rest of the world will have to find less of their national currencies to service the same debt.]

..... because, as you said, "150,000€ you would still owe 150,000€"

The rest of the world would only have to find less of their national currencies if the 150,000€ became 150,000 NewPesetas and rapid inflation took place in Spain AND (adjustable) mortgage interest rates in Spain did not increase at a rate which negated the improved exchange rate.

History shows that bouts of inflation are ALWAYS accompanied by increased interest rates.

However, if you're buying with cash.....

Yes, thats the "good" outcome, ie the mortgage gets converted to the same currency as the asset is held in.

The less good outcome is that if spain leaves the euro, but not the EU, then the mortgages remain in euro's but the asset is valued in peseta's. yikes!

People seem to be saying "but they can't do that can they...." Given the historical horse-trading around bail outs etc "they" can do what they like.

Greece is expendable for the Euro, also probably Portugal and maybe even Ireland.

But Spain and Italy are central to it. If Spain and Italy leave then to my mind the euro is toast, and the "will they convert" becomes a moot point as the they have no choice.

There's no way Greece can avoid default, now, next week, next month, it will happen, the figures are overwhelming with no escape. (Unless they get ever growing bi-annual bailouts forever and ever).

As a potential purchaser of reposession bargains (sorry, but yes I'll buy in at 1/4 the old price, sorry dude, thats how it goes) I'm more worred about the rental returns than anything else. I've got a solid 10 years before I need to sit in the sun, by which time i hope inflation and repayments have whittled the debt to very small, and by then, the economy should have picked up somewhat.

Paramount Park and Covera Airpoirt will be about to open then as well.....

Hi all,

I have just reminded myself that all of us (& me especially)  armchair - well, to be more precise, laptop, pundits are guilty of, is to be applying logic and the benefits of sad experience to Spain's economic plight. 

If logic & the experience of other Countries who have been down this route were apllied, Spain would not be in the mess it is.

Their disposal of colossal shiploads of cheap money, was different from Greece, Portugal and Ireland - Italy has always been economically "rocky" - it's what they did best.

Spain beleved that the bubble of foreigners rushing to buy their jerry-built properties (at 5 times their true worth): that tourists would ALWAY faithfully come here to spend all their pocket money: that people would buy properties, totally igoring their huge (& weird) fees that went with them: that golfers would pay through the nose to play golf in hot weather etc etc would never burst.

And so they made no contingency plans - apart from the quintessential "not my fault Guv - but someone's got to shell out to make us viable again".

None of us (especially me) knows what will happen.  I suspect that the Spanish banks & the government have even less idea.

It's the old Mr Micawber policy - something will turn up: perhaps manana..  

JD

No, I didn't get that quite right did I

I think the overiding point I'm  trying to make is I can't see BOS and Spanish lenders taking a lesser amount than they originally lent in Euros  - when I'm sure they will remain in the EU if not monetary union.

But this just a Saturday afternoon kick around - nobody can really believe that Spain will be forced out of monetary union and they certainly won't volunteer for it.

jono2000

"People seem to be saying "but they can't do that can they...." Given the historical horse-trading around bail outs etc "they" can do what they like."

That's my take on it exactly. As long as we continue to believe that 'someone else' is running the show, we'll continue to make the mistake of believing that "they can't do that". The banks are running the show. Governments have been reduced to the magician's assistant providing necessary distraction and false hope - and they'll do as they're told - but sadly not by us. 

[If logic & the experience of other Countries who have been down this route were apllied, Spain would not be in the mess it is.]

That's because we never learn this debt lesson well. So, we keep treading the same path. It's our greed that empowers 'them'.

It isn't 'Spain'. We naturally worry about that 'cos we're here. The whole world is in the same boat. Eventually, the same chickens will come home to roost in every one of them - including the UK and USA. This is nothing new. It's been happening for centuries but as the current population of the planet is the largest it's ever been, the problem now dwarfs every other instance.  

[Their disposal of colossal shiploads of cheap money, was different from Greece, Portugal and Ireland - Italy has always been economically "rocky" - it's what they did best.]

I don't see any difference. The same problem exists in every country and results from the unpayable debt accumulated (and still counting) plus the derivatives built off of them - not how frivolously it was spent.  

[But this just a Saturday afternoon kick around - nobody can really believe that Spain will be forced out of monetary union and they certainly won't volunteer for it.]

Yep! At best, we're just partially-informed amateurs trying to make sense of what little information we can glean. And it's because I don't get the important memos that I would never be as brave as you to suggest that "nobody can really believe that Spain will be forced out of monetary union and they certainly won't volunteer for it". 

So much has already happened that I never believed possible that I think it's best to consider every eventuality. 

As Mervin King said this week: "We aren't even half way through this crisis". Personally, I don't think he has a clue what fraction has already been passed nor how much is yet to come. I truly believe that they are making it up as they go along. 

If Mervin and Bernanke don't know, then I know it's very unwise for me to dismiss any possibility.   

The debate will continue and as we are all agreed it is a decision that will be taken without reference to us mere mortals. JD - I hope you dont think that I was condoning Spain refusing to meet its obligations by default. But I am inclined to think they will take a stance with the banks that have securitized their mortgages offshore (whether by branch or subsidiary) - that its their mess and they need to sort it out. The BOS is still considered lender of last resort in Spain for the Cajas (as savings banks I dont think their debt has gone offshore and their own mess is a little more vanilla). Inclined to think that if Santander, BBVA, Barclays, etc has issues overseas that relate to their Spanish mortgage book they will let them stew in their own juice ........ or be taken over by a third party ........ maybe the Qataris or Kuwaitis.

If it becomes a condition of an IMF bailout that a two tier currency system within Spain is enforced that of course is a different matter. But in a strange way this will then extend into a Human Rights issue..... and the whole bloody world is concerned with human rights. The legality of the condition I am sure would be questioned ........ and not in a 20 minute debate (or an online forum) so while any exit would take a long time.... this would have to be extended beyond a feasible time frame. Spain is essentially capitalist in nature with socialist principles. A two tier mortgage system would mean it highly unlikely anybody would ever borrow money to buy in Spain again (forget foreigners - I am talking domestically)........in extreme conditions it could also worsen "taut" relations between Madrid and the Basque region. 

Lets assume that if Greece exits ...... which seems to look more likely every day. Their economy is less focused on real estate and mortgages so less of an issue and maybe "overlooked"......that will be the benchmark. If Greece is forced to keep its mortgages in Euros then the precedent will have been set ..... if not then they havent got a cat in hells chance of forcing it on Spain.

As to the mechanics of it, I concur that its a piece of cake for them to use internal software to adjust Peseta for Euro. Should it happen, no doubt the banks will see it as an opportunity to cross sell to account holders to insure against currency volatility (another instrument they will be able to abuse).

Postscript ...... Like Mark Twain I am not a great believer in statistics because questions can be asked to get whatever results you want, but last week the ABC newspaper published the results of a survey showing that over 75% of Spanish nationals (84% PP, 76% PSOE dropping to 67% for the communists - so far not a credible possibility but like Greece it could happen) are in favour of staying in the Euro ..... the cynic in me says that the figures are so high because they think the German "safety net" will be gone if they dont. Maybe there should be more concern that Germany will get cheesed off with bearing everybodys burden.

Smiley,

Your comment that "Many years ago Spain outlawed comnplicated arbitrage and compex financial instruments such as swaps owing to the collapse of 2 relatively major banks" is all I was originally addressing.

I thought it implied that the laws eliminated their exposure to the derivatives - which they did not. You responded by saying that they'd just default - which I did not dispute - but that has no bearing on the original implication that they have no exposure as a result of the laws. 

I apologise if you weren't implying that but I'm not sure why you'd think that my addressing that implication, even if woefully incorrect, was an assumption by me that you were condoning defaulting ?? 

FWIW, I do wholeheartedly condone defaulting. 

Well, not condone it in the sense that debts should be regularly reneged upon as a matter of policy etc. but that much of this derivatives mountain was created, packaged, marketed and illegally sold in the first place and therefore should be rendered null and void (but that's a whole different subject)

One way or another they will be defaulted upon anyway. Mathematically, there is no way for them to ever be paid. The Greek 'solution' has already set a precedent. They called it 'restructuring' - but it's a default by any other name.  I feel sure there will be a lot more enforced 'restructuring' and resultant law suits filed by senior bondholders.  

With war being the fastest alternative method of reset (not yet likely - but increasingly becoming so) , maybe there's a case for ALL of us to hope for and condone toxic debt destruction via defaulting.    

This message was last edited by JD01 on 30/06/2012.

sovereign default in a historical context:

en.wikipedia.org/wiki/Sovereign_default#List_of_sovereign_debt_defaults_or_debt_restructuring

(i was going to post the entire list, but it would be tooooo long.....)

from this its plainly obvious it happens and life goes on.

for greece its time to bite the bullet and get it over with. for portgual i just don't know. for Ireland I think they'll squeak by. 

Italy and Spain are the giant question marks here. Again I think a negotiated settlement will be best.

Today I awoke to the news that Britain's weakest prime minister since I can remember is playing to the gallery offering referenda on EU membership. What a tool!

Sooner I buy into Europe the sooner I will avoid a sterling revaluation. (downwards..) 

   Britain's weakest prime minister since I can remember

Not old enough to remember Gordon Brown or Jim Callaghan then?

Well, not condone it in the sense that debts should be regularly reneged upon as a matter of policy etc. but that much of this derivatives mountain was created, packaged, marketed and illegally sold in the first place and therefore should be rendered null and void (but that's a whole different subject)

JD - the whole different subject we are in agreement on - and the comment re regular reneging. I am also in agreement that if there is no other solution then default may be the best/only possible option. Where we are perhaps at odds is whether Spain will support "its banks" where mortgages have been securitized outside of Spain using an instrument that is illegal inside Spain. One of the reasons that arbitrage instruments were made illegal is because of the financial jeopardy that was imposed on account holders with Banco Central, Bilbao Vizcaya etc when the kids were in the cookie shop with traders that had no concept of hedging or risk. MY view is that this all leads back to the original point of whether a Euro mortgage will be converted to Peseta or remain as a foreign currency mortgage in Spain. Whatever the conditions of bailout and potential Euro exit, I suspect that Spain wont roll over easily on Spanish mortgages staying in an external currency............I guess only time will tell.

As to repayment of the overall debt.........that doesnt just fall on Spains shoulders. Its a problem that spans the Atlantic if not the globe and as you say mathematically it will never be repaid......even if the entire world worked and produced for the next 100 years at break even cost.

Interesting your comment about war. I was having a chat with a mate about a week ago and offered the fact that if the world didnt have nuclear capacity to destroy itself I wouldnt mind betting it would be imminent - if not there already. I guess one small mercy we should be thankful for about nukes is that its probably stopped that course of action.

Or Ted Heath Bob