What effect would sovereign default of a European country have on personal debt or a mortgage?
Patrick, This article points out three likely effects (direct and indirect) sovereign default can have on the individual: http://tutor2u.net/blog/index.php/economics/comments/the-sovereign-default-option-is-costly/ This looks at how a default may not look like a default - even if it is. But again, how defaults can impact the man in the street: http://online.wsj.com/article/SB10001424052748703323704574602030789251824.html The fascinating Argentine default is described in a blow-by-blow format here, including brief references to things like unemployment and personal savings: http://theinflationist.com/sovereign-default/argentine-sovereign-default-2002-argentina-financial-crisis Remember, though. Not all defaults are the same. And a modern-European country's default may look very different to what has occurred elsewhere. "This is a hard question to answer.  Government debt and mortgages are loosely related.  Banks typically use yields on government bonds to determine mortgage interest rates.  The banks must be able to get higher rates from the mortgage otherwise they would buy government bonds. Your question mentions default so I'm assuming a country has reneged on its promise to pay either the principal or interest on government bonds. The main thing to consider is ""Who does not get their money?"".  In other words, who does the government decide not to pay.  This is the important part.  The government will have some money so they could pay some bond holders.  They must decide who to shaft. For example, let's look at who holds Greek government debt.  Around 70% of Greek government debt is held outside Greece.  See table below.  The Greek government could decide to default only on the debt to foreign holders.  In that case the banks in France and Switzerland would take the loss on their bonds.  This could cause severe problems in France and Switzerland depending on the percentage of Greek bonds that make up the banks' assets.  Greek banks would still face losses, however, since the price of their Greek bond holdings would drop sharply when the government defaults.  Interestingly, the losses for the Greek banks may be smaller than the losses faced by the French and Swiss banks.  This is usually the favored option chosen by government since the French and Swiss don't vote in Greece. Yields on Greek government bonds would rise dramatically.  If your Greek mortgage is an adjustable rate mortgage then you could see some big adjustments upward.  If you live in France or Switzerland then the bank that owns your mortgage may go under if Greece defaults.  During liquidation the bank will sell their assets which includes mortgages and you will probably not notice any difference in your mortgage. As I stated earlier: this is a hard question to answer since the two financial instruments involved (bonds and mortgages) are similar but may or may not be related." "If the default happens through mass monetary inflation rather than openly (""We're not paying interest on our bonds"") then make sure you pay off your house.  There may not be a very long window to do so. If the currency becomes worthless, then it depends on what you have of value that would be accepted by the lender as payment.  If you don't have anything, the lender will take it back, as they're probably entitled to on the notes."
I wish this was the case in Canada.  I lost about 60k on my home in one year and have to sell now to move for work.    In the US I could simply default and the bank takes the loss.  In Canada if I default, CMHC pays the bank, then I'm sued by CMHC and stuck with the bad debt.    Simply put - here the onus of repayment is on the lender, not the lending institution.  It sounds good until you are the one looking at losing your shirt. The prices seem very low even considering the risk? The prices are low because of the risk. Nothing happens to the banks if the sovereign defaults. However, the sovereign debt holders - lose some or all the money they lent to that sovereign. Incidentally, many banks invest in the treasury bonds of various countries, especially those they're located in. They also invest in other companies that rely on the government, or the currency. If that dependency is too high - the bank may fail. If the dependency is not high, or non-existent - the bank will survive. If the bank fails - yes, your shares will be wiped out, that's what happens with bankrupt companies. If you considering investing in banks in a country that you think may default - research them and see how much investments they have that will be affected by that default. "This is the best tl;dr I could make, [original](https://www.ecb.europa.eu/pub/pdf/scpwps/ecb.wp2073.en.pdf) reduced by 99%. (I'm a bot) ***** &gt; Inflation Housing Demand + 0 + + 0 0 Mon Pol  +  + 0 0 Loans Supply Lend Rates 0 +  0  + A. Supply A. Demand +  + + The first column lists the endogenous variables of the VAR, which react to the shocks reported in the first row: housing demand shocks, monetary policy innovations, shocks to the credit supply, aggregate supply and demand shocks.  &gt; The patterns used to distinguish aggregate demand and supply shocks are commonly used in the literature, we are able to discriminate house prices shocks from loans supply and lending rates shocks on the ground of economic theory.  &gt; In Spain, in the absence of other shocks, if the growth rates of real consumption had been driven exclusively by housing demand shocks, they would have been largest around 1995 and 2004, and lowest in 2012.18 The cumulative effect of housing demand shocks is rather muted in the remaining countries.   ***** [**Extended Summary**](http://np.reddit.com/r/autotldr/comments/6gxbr4/ecb_house_prices_and_monetary_policy_in_the_euro/) | [FAQ](http://np.reddit.com/r/autotldr/comments/31b9fm/faq_autotldr_bot/ ""Version 1.65, ~142717 tl;drs so far."") | [Feedback](http://np.reddit.com/message/compose?to=%23autotldr ""PM's and comments are monitored, constructive feedback is welcome."") | *Top* *keywords*: **shock**^#1 **price**^#2 **House**^#3 **housing**^#4 **policy**^#5" You're right, but it's kind of a meaningless indicator because it doesn't account for important qualitative information about the debt: who owns it, the credibility of the central bank, etc.  Countries like the US and Japan can service a much higher debt load than Greece can, for reasons I went in to below. "The Euro is not the reason for the debt crisis. It is only preventing those countries affected from using the easy way out. The fault is entirely that of those countries.  They were given billions and billions in structural aid, to put the ""convergence criteria"" into reality. Instead they chose bubble economies. And no, this is not the same all around Europe. I don't see France or Germany having a giant property bubble." Also, interest rates and credit risk directly corelate to Greece's ability to service the debt.  Japan could be at 400% and Greece 50%, but if they can't make payments or have credit good enought to refi the debt, that's when they will default.   Meanwhile, the fact that they are risky drives up rates further and makes it even harder to make payments.  It's called the death spiral.   Japan has low rates, solid GDP and good credit = non-issue. Typically the debt is held by individuals, corporations and investment funds, not by other countries. In cases where substantial amounts are held by other countries, those countries are typically not in debt themselves (e.g. China has huge holdings of US Treasuries). If the debts were all cancelled, then the holders of the debt (as listed above) would lose out badly and the knock-on effects on the economy would be substantial. Also, governments that default tend to find it harder to borrow money again in the future. Well, if someone who owes me money defaults, I lose the money he promised to pay me.    To me that would be a huge moral obstacle for declaring myself bankrupt.  I was raised in believing that you keep your promises. "What a great explanation! I was familiar with many of the concepts, but I've learnt quite a lot. Do you happen to know any sources for further reading that are just as understandable to a non-economist? And/Or would you mind continuing / expanding this into whichever direction you find worth exploring? I would love to see this explanation ""connected"" to the debt crisis and how/why the US and europe seem to be in different situations there. Maybe that would be too complex to explain in more detail using your model, but maybe it is possible..?" "The term ""stock"" here refers to a static number as contrasted to flows, e.g. population vs. population growth. Stock, in this context, is not at all related to an equity instrument.  Yes, annual refinance costs, interest rate payments etc. are what we should be looking at when assessing debt burden. Those are flows. That was my point when cautioning against naive debt GDP comparisons.  Also, keep in mind that by borrowing in it's sovereign currency, the US has an enormous amount of monetary tools to handle the debt if it ever became a problem. Greece, by comparison, is at the mercy of the ECB, so they only have fiscal levers to pull. The interest expense does not strike me as especially concerning, but I'd be happy to verify BIS or IMF reports if you would like." Credit agency sovereign ratings take into account the amount of external support the government is likely to get during a time of stress.  The whole EU just came to Spain's rescue, but who would come to India's rescue so as to be sufficient to prevent default?  See, the fact that Spain was able to get a bailout is most of the reason Spain's credit rating is higher than India's. Some of the factors that will act on house prices are: There will likely be a recession in that country, which will lower incomes and probably lower housing prices. It will likely be harder to get credit in that country so that too will increase demand and depress demand for housing (cf the USA in 2010.) If Greece leaves the Euro, that will possibly depress future economic growth, through decreased trade and investment, and possibly decreased transfer payments. Eventually the budget will need to come back into balanced which also is likely to push down house prices. In some European countries (most famously Spain) there's been a lot of speculative building which is likely to hang over the market. Both countries have governance and mandate problems, and who knows how long or how much turmoil it will take to sort that out. Some of these factors may already be priced in, and perhaps prices are already near what will turn out to be the low. In the Euro zone you have the nearly unprecedented situation of the countries being very strongly tied into another currency, so the typical exchange-rate movements that played out in Argentina cannot act here.  A lot will depend on whether the countries are bailed out, or leave the Euro (and if so how), etc.  Typically inflation has been a knock-on effect of the exchange rate moves so it's hard to see if that will happen in Greece. Looking back from 2031, buying in southern Europe in 2011 may turn out to be a good investment.  But I don't think you could reasonably call it a safe defensive investment. It will affect Greeks as any bankruptcy affects the bankrupt. They already started reducing their welfare policies and government hand-outs. Default would mean that the government isn't able to meet its obligations. It's not only the external obligations, it's also the internal obligations - pensions, social security benefits, healthcare, public services, military (and the Greeks are in constant confrontation with the neighboring Turkey, with several armed conflicts throughout the years) - all that will get hit. Yes, they will get affected much more, definitely. It's only symbolic if things continue as if nothing had happened.  Once large segments of people start becoming poor, it ceases to be symbolic and starts becoming real. Will a Greek default be felt in the US?  Hard to say, but probably not.  Will it be felt in Greece?  You bet it will. It seems possible if the Euro is partially/entirely unwound that policies could be enacted to prohibit exactly this behavior, otherwise what will stop outflow to the stronger countries on a massive scale? (Thus amplifying the resulting decade-long clusterfuck)  We've never had this situation in Europe before, and already for Greece and Spain there are suggestions to instigate withdrawal controls. It doesn't seem far fetched to imagine retroactive controls placed on private deposits in newly-foreign-currency banks.  If I were concerned about the Euro's collapse I'd be more inclined to move assets out of the eurozone entirely