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What will happen if the country bankrupts or it exits the euro zone?

I am a Greek resident and the loan will originate from a Greek bank. The property is located in Greece as well.

  • Are you worried that the bank will go out of business and not be there to take your loan payments anymore? – JohnFx Jul 12 '11 at 18:47
  • Does the property have a strong depand for it from people that live outside of Greece? A top rate holiday home overlooking the see on a nice Greeke island got cheaply from a forced seller, may be a good option. – Ian Aug 18 '11 at 12:18
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The safest financial decisions that you can make in Greece involve getting your money out of Greece.

That said, it depends. If the economy is going to implode and you'll be out of the job with devalued savings -- you'll be bankrupt anyway. You didn't mention enough about your situation for anyone to really answer the question. In a high-inflation environment, *if*you have the assets to weather the storm, holding debt on real property and durable goods is a good thing.

The key considerations are:

  • Do you have assets that will allow you to make it through the crisis?
  • Will someone convert your Euro-denominated loan into some Greek currency? (Answer: Nobody knows that answer)
  • Is the property desirable?

If you have the means, times of crisis are great opportunities.

  • While I would agree that 'nobody knows the answer' I think we can successfully speculate on what is most probable. Given that the drachma is likely to be weak relative to the euro, and that banks rarely act out of anything except self interest, and that it would be in the bank's best interest to keep a debt originated in Euros in that same currency, Then the likelyhood is that the bank would not convert to drachma unless forced to do so by an outside agency such as the government, which is unlikely given the resources banks have to lobby for legislation in their favor. – Chuck van der Linden Jul 14 '11 at 8:09
  • Marking as correct answer for pointing out the key considerations and that it really depends on the personal situation. – Mariusz Miesiak Jul 15 '11 at 10:47
  • @Chuck van Der Linden: In normal circumstances, I would agree with you. But in a crisis situation, anything can happen. The Greek government could nationalize the banks, or make some deal where the EU/IMF people apply an arbitrary value to the "new drachma". – duffbeer703 Jul 17 '11 at 17:18
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While I would be very leery of making any Investments in Greece, and if I lived there might want to strongly consider a larger than average investment in 'international' funds (such as an index fund on the US, UK, or German exchanges) Having debt in Greece might not be such a bad thing... if only it was denominated in local currency.

The big issue is that right now, you'd be taking out a loan on property in greece, that would be denominated in Euros. If worse comes to worse, and Greece is kicked out of the EU and forced to go back to the drachma, then you might be in a situation where the bank says "this loan is in Euros, we want payment in the same" and if the drachma is plummeting vs the Euro, you could find your earning power (presuming you were then paid in drachma) greatly diminished.. And since you'd be selling the house for drachma, you might be way under-water in terms of the value of the house (due to currency exchange) vs what you owed.

Now, if Greece were currently on the drachma, and you were talking about a mortgage in the same, I'd say go for it. Since what tends to happen when a government has way overspent is they just print more money rather than default.. that tends to lead to inflation, and a falling currency value vs other countries. None of which is bad for someone with a debt which would be rapidly shrinking due to the effect of inflation.

but right now, safer to rent.

  • I was thinking along the same lines "denominated in local currency" is hard when you don't know what the local currency will be in a few hours time! – Ian Aug 18 '11 at 12:10
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Please clarify your question. What do you mean by "..loan in Greece"? If you are referring to taking a mortgage loan to purchase residential property in Greece, there are two factors to consider:

  1. Source of the loan
  2. Property location

If the loan originates from a Greek bank, then odds are likely that the bank will be nationalized by the government if Greece defaults. If the loan is external (i.e. from J.P. Morgan or some foreign bank), then the default will certainly affect any bank that trades/maintains Euros, but banks that are registered outside of Greece won't be nationalized.

So what does nationalizing mean for your loan? You will still be expected to pay it according to the terms of the contract. I'd recommend against an adjustable rate contract since rates will certainly rise in a default situation.

As for property, that's a different story. There have been reports of violence in Greece already, and if the country defaults, imposes austerity measures, etc, odds are there will be more violence that can harm your property. Furthermore, there is a remote possibility that the government can attempt to acquire your private property. Unlikely, but possible. You could sue in this scenario on property rights violations but things will be very messy from that point on.

If Greece doesn't default but just exits the Euro Zone, the situation will be similar. The Drachma will be weak and confidence will be poor, and unrest is a likely outcome.

These are not statements of facts but rather my opinion, because I cannot peek into the future. Nonetheless, I would advise against taking a mortgage for property in Greece at this point in time.

  • I have update my question. Thanks for your comment. – Mariusz Miesiak Jul 12 '11 at 18:08
  • In case the Drachma is being used am I still going to pay my loan in Euro, or will it be exchanged for Drachma? If latter happens how much the costs of the loan can raise? – Mariusz Miesiak Jul 12 '11 at 18:20
  • Nobody knows the answer to that question. – duffbeer703 Jul 12 '11 at 19:54
  • +1 for recommending against adjustable rate. Definitely the rates will not get any lower in the next several years. – Mariusz Miesiak Jul 15 '11 at 10:45
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No it is not safe to take out a new mortgage - loan or anything credit related or any investment - in greece.

Growing political risk, bonds have junk credit rating.

You will be underwater on your mortgage the day you apply for it. And you better believe that the buyers will be dry once you realize that it doesn't make sense to keep paying the mortgage. If you want to have some assets, there are more liquid things you can own, in your case: paper gold.

Just rent.

  • It depends. Real property is always worth something. If you have 100k Euro in a German bank for $100k US dollars, and a new Greek currency emerges, you might find yourself with alot of "New Drachmas" or whatever. The other big factor is the property. The Greek equivalent of a McMansion with a 90 minute commute to a city is probably not valuable. A place on the water or near a central business district probably is valuable. – duffbeer703 Jul 13 '11 at 16:19
  • Yeah the real property is worth something.. but the danger is in potentially winding up with a liability denominated in a stronger currency than your assets and income. Even if it's worth a lot of Drachma if sold, that 'lot of drachma' could be worth far far less than the 'few euro' balance due on the debt. – Chuck van der Linden Jul 14 '11 at 8:12
  • Also, you will be ILLIQUID, this is the real point I was trying to make. Nobody will be buying, there will be a lot of selling as a flight to safety, and potential for more citizen unrest which will a) endanger you and your property b) cause your property to decline in value even more – RD. Jul 14 '11 at 17:26

protected by Chris W. Rea Apr 25 '13 at 11:35

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