How might my finances change if euro collapsed?

Wednesday 05 December 2012 12.28
How might my finances change if euro collapsed?

The thought of the euro collapsing was unimaginable a year ago, but European leaders are now scrambling to save the single currency.

Here, we sketch out what could theoretically happen household finances if the euro collapsed and Ireland had to go it alone financially.

Broadly, such a worst-case scenario could cause incalculable problems for every individual in the state with public-sector wages threatened, savings slashed in value and the possibility, for some, of increased mortgages.

Punts

If the punt were re-introduced, it would take a significant amount of time to get enough currency into the system. The uncertainty could spark off rumours and stock-market turmoil.

There is no guide for what might happen next but the logistics would mean all ATMs over time would have to be restocked with punts; cash tills would have to be recalibrated for punts as would all payroll systems, transaction systems and banking sytems.

The punt would emerge as the new Irish currency as the stock markets open on a Monday morning and the markets would determine its worth.

When Argentina defaulted on its foreign debt, the Argentine peso - which was pegged at a par to the US dollar - lost about 70% of its value.

However, the difference is that if the Euro collapsed Ireland would not be defaulting. Ireland still has a four-year deal with the IMF/ECB/EU troika to provide the funding necessary to finance the state.

Savings

The Government has recently renewed its €100,000 bank guarantee.

It is unclear what would happen if the punt were to be re-introduced. 

However, the money which is currently lodged in savings accounts in euro would most likely be transferred into the Irish punt at whatever the exchange rate would be. 

It's worth remembering that when the euro was introduced the Irish punt was worth €1.27.

Even without a hypothetical collapse of the euro, there has been turmoil in the currency markets. This is why investments in gold and currencies such as the Danish kroner are seen as safe havens, and of course the US dollar, still the currency of choice for central banks.

Mortgages

No Irish bank was prepared to say how they would view mortgages in this doomsday scenario.

But it is possible that house prices could be re-valued in punts, but yet customers might still be obliged to repay the original euro loan.

It is conceivable that tracker mortgages might disappear completely because they are pegged to the ECB rate which would no longer pertain.

Banking

Cian Twomey, lecturer in financial economics at NUI, Galway, says the collapse of the euro would bring unimaginable problems and the impact on mortgages and savings would be "the least of our problems".

"Any break-up would be chaotic and disorderly. There would be a full-scale banking collapse," he says. "Things have been hard in the last four years, but at least the banking system is still there and operating."

He says the value of any new currency is "a complete unknown" but that initially there would be a "very sharp collapse and over time it might find some equilibrium".

House prices

The economic turbulence could mean house prices could fall further in the short term.

Consumer goods

Foreign imports could rise in price if a new Irish currency valued significantly less than the euro.

The cost of locally produced goods would remain the same, but clothing, shoes, wine, foreign fruit and veg - which would include everything from the humble banana and orange to the more exotic foodstuffs - might increase in price.

On the other hand, Irish goods would be much cheaper for foreign buyers, which would probably boost exports.

'Europe-wide problem'

"Ireland is not going to suddenly exit the euro; that would be
suicide. If it happens it would be a Europe-wide problem and each
nation would look after themselves," says Cian Twomey.

Keywords: punts, euro