If Spain exits Eurozone, what happens with loans?

CastellonMark

I live in Spain and I have both a NatWest UK Sterling and a Bankia Spanish Euro bank account. I have a 5K overdraft facility with my Spanish bank, which I've used up. I am convinced that Spain will leave the Euro and go back to the pesata. I have some money coming my way soon, and could now pay off the 5K overdraft facility. Would like some advice on what people think will happen, when Spain leaves the Euro, will they devalue? will existing loans still be in valued in Euros? should I pay it off now, or wait till after the exit from the euro?
Your sensible suggestions welcomed.

jonesMUFCforever

IMO it will not happen anytime soon.
If Spanish government asks for a bailout they will get it.

However to answer your question - your debt is repayable whether in Euros or Pesetas. There is no get out clause if the currency fails.

CastellonMark

jonesMUFCforever wrote: »

IMO it will not happen anytime soon.
If Spanish government asks for a bailout they will get it.

However to answer your question - your debt is repayable whether in Euros or Pesetas. There is no get out clause if the currency fails.

Yes of course, but if the currency of the loan devalues, would I not be better off leaving the 5K in my UK account (assuming sterling stays pretty much the same value), untill after the devaluation, and then repay it, no?

jonesMUFCforever

Who knows - but the Euro governments will decide the fixed rate between the Euro and the Peseta IF IT HAPPENS!

Nukumai

CastellonMark wrote: »

Would like some advice on what people think will happen, when Spain leaves the Euro, will they devalue? will existing loans still be in valued in Euros? should I pay it off now, or wait till after the exit from the euro?
Your sensible suggestions welcomed.

My strong view is that it will not happen.

If it did, however, you would certainly be better off having offshore funds, as ESP would adopt a trend of devaluation with respect to EUR (the Spanish economy is, after all, currently in the toilet). The govt would, as somebody else has mentioned, set a fixed conversion rate, and would almost certainly bring in immediate legislation forcing banks to denominate domestic customer balances in ESP.

You would also likely get the biggest bang for your buck (excuse the pun) by converting your foreign currency into ESP on the "unofficial" market (blackmarket) as the official rate would be somewhat artificial.

Caveat : there is also the market's reaction to this event to consider. That is to say, if it is generally held that the Spanish exit - whilst positive in terms of the makeup of constituent euro economies is positive - nonetheless suggests that other nations might now also be more likely to exit...then ESP could appreciate against a weakening EUR etc. etc. There are many variables, and they are not always intuitive. And as the old saying goes : "the markets can stay irrational for longer than you can stay solvent".

Good luck either way...

al25

CastellonMark wrote: »

. Would like some advice on what people think will happen, when Spain leaves the Euro, will they devalue? will existing loans still be in valued in Euros? should I pay it off now, or wait till after the exit from the euro?
Your sensible suggestions welcomed.

In my book, it's more of an IF Spain leaves the Euro, rather than when.
In my view, the Euro currency union will exist as it is (Including Greece) at least one more decade, before Europeans start admitting it's not something that works for everyone's benefit.

mulronie

jonesMUFCforever wrote: »

Who knows - but the Euro governments will decide the fixed rate between the Euro and the Peseta IF IT HAPPENS!

Sorry but I have to dispute this...

If Spain left the Euro, any contracts written under Spanish law with consideration in Euro would be payable instead in new-Peseta. To achieve this, the Spanish government would pass a law that "as of Date DD/MM/YYYY, all contracts under Spanish law referencing Euro will be converted to new-Peseta at a rate of [1 Euro: XXX New-Peseta]".

However, that initial rate would only be used to convert Euro to new-Peseta in existing contracts. The Spanish government continuing to maintain a fixed peg against Euro for their new-Peseta would be totally pointless - the current problem is exactly because there is a fixed exchange rate between the Euro and the old Peseta! Since the 31st December 1998, one Euro has been worth no more and no less than 166.386 old Pesetas exactly.

From its inception a new-Peseta would float on the market and find a price against the Euro. Chances are, the market would very quickly price the "new" Peseta down (i.e. 1 Euro would buy far more than the amount mandated in the Spanish conversion law) to reflect the new-found ability of the Spanish government to print themselves happy.

A (very) brave person wishing to exploit this would acquire some Euro liabilities in Spain, and some corresponding Euro assets in Germany.