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Old 06.08.2012, 21:37
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Basic economics question

Lots of professional and armchair experts out there on matters financial....

If one were thinking of buying some property in a country which hasn't yet, but is potentially on the edge of going "t*ts up" economically speaking...(think Italy, Spain, Portugal...rather than Greece or Ireland)

...versus the interest rates in that country today, would you expect the rates to increase when (if?) the crash happens (because banks are looking to encourage savings and prudence) or decrease (as they need to drop to get the economy going again)?

In my non-expert mind, I can make a case for either happening, so toss a coin.....but maybe there are some more fundamental economic points at play which will make something ALWAYS happen

(Futile to say it - but not particularly looking for advice on the plan - it would be for other reasons than investment)

Last edited by Caviarchips; 08.08.2012 at 13:33. Reason: spelling
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Old 06.08.2012, 22:23
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Re: Basic economics question

Nothing always happens in economics as there are two many new developments that make it different this time. In classical monetary economics, central banks can decrease rates to stimulate an economy. This is normal. Lower rates, people and firms wont be inclined to save, and will rather invest instead yadda yadda.

But two things:

One, the role of fiscal responses can skew this relationship. Individual overnments can tax and spend etc

Two, we are talking the ECB here and they have to look at this in the context of all their member states with one eye on the future. They can use their balance sheet to buy up toxic bank assets and so on.

So you are never going to get a straight answer here. Best you can do is make a reasoned guess. At the moments, rates are already at historical lows worldwide in developed countries.

My guess is that rates arent going to go higher for a very long time, ie five years, as the weakness will prolong for a lot longer seeing as expectations have been continually managed downward since the beginning of the crisis. Basically, they might go marginally lower but they cant go much lower as they are already less than two percent in Europe. http://www.ecb.int/home/html/index.en.html
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Old 06.08.2012, 22:34
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Re: Basic economics question

You've also got to consider that as the pressure increases, the authorities will be tempted to dream up even more taxes for foreign property owners. There is an interesting article in yesterday's Sonntag Zeitung about "Liegenschaft in Ausland"
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Old 08.08.2012, 09:56
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Re: Basic economics question

Surprised that I didn't get more input - I thought there were a huge number of bankers and experts here
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Old 08.08.2012, 10:02
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Re: Basic economics question

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Surprised that I didn't get more input - I thought there were a huge number of bankers and experts here
The problem here is probably with the word 'experts', there doesn't appear to be many of them around judging by the state the financial world is in.
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Old 08.08.2012, 10:15
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Re: Basic economics question

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Lots of professional and armchair experts out there on matters financial....

If one were thinking of buying some property in a country which hasn't yet, but is potentially on the edge of going "t*ts up" economically speaking...(think Italy, Spain, Portugal...rather than Greece or Ireland)

...versus the interest rates in that country today, would you expect the rates to increase when (if?) the crash happens (because banks are looking to encourage savings and prudence) or decrease (as they need to drop to get the economy going again)?

In my non-expert mind, I can make a case for either happening, so toss a coin.....but maybe there are some more fundamental economic points at play which will make something ALWAYS happen

(Futile to say it - but not particularly looking for advice on the plan - it would be for other reasons that investment)
This is not the time to be "thinking of buying" anything in a currency that is not your 'home' one. ie where your end saving will be. A possible exception is US$. Looks like the US will be self sufficient in energy in 5 to 8 years.

Interest rates generally reflect the strength of a currency: the higher the weaker the currency. Banks don't really set rates. The rates are forced on them by the markets. Thus I would expect the new drachma to have an interest rate of at least 15%, but a value of 60% below the current euro...
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Old 08.08.2012, 10:32
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Re: Basic economics question

If country X stays within the Euro zone:

-we are close to the zero lower bound, so central bank rates can't go down much further
-risk premia however in that specific country are likely to increase, and hence mortgage rates

If country X quits the Euro zone:

-the situation is probably more like the Japanese one (google for balance sheet recession), i.e. low interest rates, since excess savings in the private sector need to go somewhere.
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Old 08.08.2012, 10:58
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Re: Basic economics question

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Lots of professional and armchair experts out there on matters financial....

If one were thinking of buying some property in a country which hasn't yet, but is potentially on the edge of going "t*ts up" economically speaking...(think Italy, Spain, Portugal...rather than Greece or Ireland)

...versus the interest rates in that country today, would you expect the rates to increase when (if?) the crash happens (because banks are looking to encourage savings and prudence) or decrease (as they need to drop to get the economy going again)?

In my non-expert mind, I can make a case for either happening, so toss a coin.....but maybe there are some more fundamental economic points at play which will make something ALWAYS happen

(Futile to say it - but not particularly looking for advice on the plan - it would be for other reasons that investment)
depends what you mean by titsup. if you mean that they are effectively cut off from market financing, then i would expect govt bond yields to shoot up.

at the same time, i'd expect house prices to plummet and mortgage lending to become more difficult.
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Old 08.08.2012, 11:19
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Re: Basic economics question

The theory says that when a country runs into trouble, the lending rates go up, inflation goes up, currency devaluates and goes down against more
stable ones.
But all the country you mentioned are part of the Euro, meaning that the currency and lending rates do not fluctuate freely but are rather an average of the financial soundness of all Euro countries, Germany weighting a lot in the overall picture...so when Italy goes bust, the ECB will increase the money flow to try to soften the crisis and the EURO lending rates will in fact go down (for your mortgage).
If Italy goes bust and leaves the Euro, it will switch back to the Lira and then the local Lira rates will shoot up, but you shouldn't be affected since you've signed a Euro mortgage. The value of your house in Italy and in Lira will drop so your assets will be in Lira and liabilities in Euro...not good.
You first need to decide: how likely is it for those countries to leave the Euro? then you have your answer.
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Old 08.08.2012, 11:40
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Re: Basic economics question

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depends what you mean by titsup. if you mean that they are effectively cut off from market financing, then i would expect govt bond yields to shoot up.

at the same time, i'd expect house prices to plummet and mortgage lending to become more difficult.
So would the net impact be largely zero - ie the property price goes lower so the mortgage required gets lower....but the repayments get higher as a %....so net/net, nothing in it?
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Old 08.08.2012, 11:52
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Re: Basic economics question

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So would the net impact be largely zero - ie the property price goes lower so the mortgage required gets lower....but the repayments get higher as a %....so net/net, nothing in it?
i'd say you'd be better of buying post-crash, but you might not be able to get funding (i.e. may need to be cash buyer or have a large deposit).
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Old 08.08.2012, 11:53
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Re: Basic economics question

I live in Spain most of the year now. My boss owns about 23,000sqr meters of real estate here. We have done tons of work on the subject. Basically the spread between Spanish and German unemployment rates has always led to a specific and correlated spread in interest rates. So based on this risk profile Spanish rates should be at 16%.

If we take that into consideration we can also see that mortgage rates need to explode. Bankinter and Sabadell look like the next two banks to go and these are much bigger than Bankia.

Until they leave the Eurozone you will have massive deflation. FYI, it costs more to build a basic two stroke engine in Spain than it does to make a BMW engine in Germany. Unit labor costs in Germany are now below that of Spain, Greece, France, and Italy. So wages need to drop by about 30% in these countries. Thats not easy, especially in Greece where the socialists have given the unions unchecked powers, and will take years.

I still have Russian clients buying up Islands in Greece etc. But in Spain the turn over of homes keeps dropping. Prices still need to drop another 20% or 30%.

The mortgage on the house we wanted to buy was about Euro8,000 per month. We offered the owner 60,000 cash, up front, for a 3 year lease. This is normal here and shows how big of a negative carry property has. Thats less than 1,700 per month for an 8 bedroom home with 10acres of gardens. Spain is cheap but my most metrics it will get cheaper.

When the banks go bust they have to dump real estate pushing the prices down even further.

There are some deals out there though. You can get a zero-down mortgage from any bank here if you buy one of their repossessed properties. But you have to pay +2,200 per sqr meter! You can get most apartments here for about 1,800 these days if you pay cash.

But you should wait until the shit hits the fan. Wait till a bank goes bust.
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Old 08.08.2012, 11:56
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Re: Basic economics question

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You first need to decide: how likely is it for those countries to leave the Euro? then you have your answer.
The "leave the Euro" story is sold by speculators and bought by ignorants.

The line we are supposed to buy is that these countries will be able to "devaluate their way out of debt" and "stimulate their growth thanks to a weak currency".

Of course as always there are a couple of snags with this brilliant theory.

a) Greece and Italy have devalued their former currencies a number of times. Did they "devaluate their way out of debt"?

b) Hard currency debt isn't affected by a currency change. You can change your currency to pebbles and marbles, but your debt will still have to be reimbursed in hard currency.

c) Did Italy and Greece witness above-par economic growth through 40-odd years of devaluating currencies?
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Old 08.08.2012, 12:05
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Re: Basic economics question

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b) Hard currency debt isn't affected by a currency change. You can change your currency to pebbles and marbles, but your debt will still have to be reimbursed in hard currency.
obviously a euro exit would be done in conjunction with a unilateral re-denomination of euro debts into the new local currency, or defaulting on them entirely.
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Old 08.08.2012, 12:27
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Re: Basic economics question

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The "leave the Euro" story is sold by speculators and bought by ignorants.
Well it looks like all those concepts are a bit unclear to you.

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a) Greece and Italy have devalued their former currencies a number of times. Did they "devaluate their way out of debt"?
Yes they did, otherwise they would have deflauted and their labour cost would be much higher and unsustainable.

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b) Hard currency debt isn't affected by a currency change. You can change your currency to pebbles and marbles, but your debt will still have to be reimbursed in hard currency.

c) Did Italy and Greece witness above-par economic growth through 40-odd years of devaluating currencies?
Did you understand that devaluating was a way to achieve above-par growth?? Along with default, it's the only escape when the debt burden becomes unsustainable.
And we can bet but Greece is exiting the Euro soon, so let's see who the ignorant is then.
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Old 08.08.2012, 12:40
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Re: Basic economics question

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Yes they did, otherwise they would have deflauted and their labour cost would be much higher and unsustainable.
Is that so

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Did you understand that devaluating was a way to achieve above-par growth?? Along with default, it's the only escape when the debt burden becomes unsustainable.
And we can bet but Greece is exiting the Euro soon, so let's see who the ignorant is then.
Ah yes I'm sorry. So are you suggesting a country should run perpetual budget deficits and sub-par growth and somehow survive by the sole magic of currency devaluation? This must be a very novel concept. I think the last country to try this albeit rather unsuccesfully was Zimbabwe.

Do educate me what an EUR exit will do for Greek EUR-denominated debt.
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Old 08.08.2012, 12:42
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Re: Basic economics question

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Surprised that I didn't get more input - I thought there were a huge number of bankers and experts here
Because nobody can seriously answer this question:

a) banks follow with their interest rates the rates they can get from central banks. So in short is it more or less a political decision. I personally believe that in the Eurozone the interests will stay fairly low the comning years - because the EZB is politically relatively independant and will not want to choke whatever economy is left...

b) if the Euro goes down, it gets completely unpredictable. This would be mainly a political decision, and with the current team of European leaders do I not make any assumption on how smart the ideas are they come up next.

c) If a single country for example Greece, would drop out of the Euro and your property happens to be there does the interest rates chane heavily depend on the economists outlook for that individual country. I'd expect the rate for Greece to go through the roof.

So giving a single answer for a question with so many variables really requires a well polished crystal ball.

My bottom line: I would currently not make any huge investments in countries with shaky economies... and there are plenty of alternatives: A friends parents retired in a stunning house in Montenegro - looks like you can get easily as much house for your buck there than in Spain or Italy...
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Old 08.08.2012, 12:44
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Re: Basic economics question

If you are not a Spanish or Portuguese working in CH, then I wouldn't suggest to buy a property in Spain or Portugal, respectively. Otherwise, I think in the long term you can have good return.

Ofcourse, it also depend on the type of property. For example, if you buy a commercial property like a shop it will be different then buying a house or flat. However, my humble choice would always be with investing in a field for future investments.
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Old 08.08.2012, 13:16
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Re: Basic economics question

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c) Did Italy and Greece witness above-par economic growth through 40-odd years of devaluating currencies?
No, but Germany is currently benefiting from a devalued (or undervalued) currency...
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Old 08.08.2012, 13:22
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Re: Basic economics question

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c) Did Italy and Greece witness above-par economic growth through 40-odd years of devaluating currencies?
of course.

http://en.wikipedia.org/wiki/Beggar_thy_neighbour
http://en.wikipedia.org/wiki/Competitive_devaluation
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