What's NAMA got to do with it?

Slí Eile: Two questions:
1 Has the Bord Snip process anything to do with the banking/NAMA debacle? Colm McCarthy emphatically says no but he misses the larger picture not only going forward, but going backwards as well.
2 Is the assumption that property values will recover by 10% enough to recoup the short-term losses for Irish taxpayers (otherwise known as NAMA/NTMA) over-paying for assets? The answer to this all depends on what other assumptions you make:

It may be stating the all too obvious, but to date nobody has gone through all the loan books of all financial institutions in respect of all types of assets from landbanks to shopping centres to residential property. It is safe to assume that – in the absence of detailed explanations and briefing documents in the public domain – a number of heroic assumptions have been made somewhere, at some level, to arrive at a ‘current market value’ of €47bn in respect of assets held by banks and financial institutions, to be transferred some time soon to the Irish taxpayer.

Just to run through the arithmetic for a few seconds…..there is an estimated €88bn in assets to be bought by the Irish taxpayer. Take 77% as the ‘loan-to-value’ ratio’ and apply this to €88bn to get €68bn (rounded). Now add €9bn in ‘rolled up interest’ and you get €77bn.. Then, it has been decided to discount this figure of €77bn at 33% to get €54bn - sum to be lent by Irish taxpayers to the banks by means of a special bond issue. The banks will use these bonds (on which the taxpayer must pay 1.5% per annum interest) as collateral against which the European Central Bank will lend the same amount of €54bn to the banks.

Now, the ‘current market value’ of all these assets is estimated (assumed?) to be €47bn. This latter estimate is based on an estimated/assumed 47%. The difference between 54bn to be lent by the Irish taxpayer to the banks and the €47bn in ‘estimated current value’ is €7bn.

So, we are told, all you need is an annual 1% growth in property and the Irish taxpayer has covered his/her losses in the short-term. It would be interesting to see the detailed (assumed) cost and revenue flows under different scenarios. However, the real elephant in the parlour is the supposed current-day cost of these loans, and how any potential value in recovery will kick in. If our starting point baseline assumption is seriously out (by even say €3bn) then the required recovery growth in values will be all the greater. In a good piece in the Sunday Business Post on 20 September, journalist Richard Curran, looked at some of the components of the asset bundle. Landbank accounts for 36%; development for 28%; and ‘associated’ (mainly commercial properties) for the remaining 36%. Curran cites a number of information sources to arrive at a conclusion that the likely value of landbanks is much less than what is assumed. He reckons that it may have fallen from around €32bn to around $13bn. He questions the assumption that the drop in value of ‘development projects’ (Zoe group territory) is only 60%. In the aggregate, he arrives at a current market value of €39bn compared to the figure of €47bn that Government is working off. Market prices would need to jump by at least 33% to keep pace with this scale of over-payment (€54bn minus €39bn). Even then, there is huge uncertainty about future costs including (as is inevitable) a large increase in interest rates as the European economy is likely to recover from 2010 onwards.

The assumption of strong and sustained asset price recovery is problematic from two points of view:
Historical evidence is not a strong advocate of such a trend following property bubble implosions; and
the need to contain particular non-wage costs including rental costs and property is not helped by a view that we need to return to something like 2004 property prices (which were already over-inflated).

So, Social Justice Ireland is very right to say that – in the long-run – the Irish taxpayer will pick up the bill on NAMA and, hence, the issue of spending, debt and future liabilities are all inter-linked exposing the current taxpaying population and future ones to a massive risk against a climate of international recession and continuing pressure on costs, exports, competitiveness and fiscal balance, Lets say, NAMA and all that hangs out of it, is the bale of iron that breaks the camel’s back

I very much agree with Karl Whelan in his column in the Irish Times last Friday when he says that:
In reality, the bonds issued by Nama will be a huge addition to the stock of debt (IOUs) that must be paid back by the Irish taxpayer, a stock that is already rising so rapidly that there are serious international concerns about its sustainability, with very real consequences in the form of expenditure cuts and tax hikes.

So, NAMA – the child of the Irish Bermuda Triangle (Banks, Party and Developers) – has everything to with the current and prospective state of our public finances because:
The roots of the implosion in tax revenues and escalating public deficit are intertwined with those of the Bermuda Triangle that augmented the economic wreckage caused by the world recession.

Going forward, there is a massive risk exposure for citizens as any loss in values will be at the price of public services, health, equality and social concord. As Olivia O’Leary commented recently at a book launch on Rebuilding Trust in Banking: Essays in Regulation, Corporate Governance and Ethics by Ray Kinsella – if centrist governments impose an economic serfdom on citizen,s they may turn to the political extremes.

The point is to build a positive, political, credible, coherent and united progressive front on the left of centre to the current consensus in order to implement a programme of economic, social and democratic renewal. The time is long overdue. Ireland and its children deserve better than the present offerings of centre-right politics.

Posted in: Fiscal policy

Tagged with: NAMA