Michael Burke: Leading critics of NAMA argued prior to its inception that it would provide no new credit in the economy. Writing in today's Irish Times, Karl Whelan shows how his prediction and that of many others was entirely correct. This is despite repeated assurances from Ministers that NAMA assets could be used by Irish banks as collateral at the European Central Bank to increase lending. This was another of many recent fictions.
But there may also be another, imminent negative effect arising from the creation of NAMA.
Bond investors are more comfortable lending when there is greater security on their principal. I have argued elsewhere that currently bond investors show a clear preference for lending to governments engaged in reflation,
and that they take fright when there is no clear improvement in the economic and deficit outlook.
It is not necessary to agree with the interpretation of reflation to recognise the simple truth regarding investors' preference for getting their money back. But that begs an awful, €54bn question. If bond market investors take a negative view of NAMA's viability, will they buy the bonds, or, if so, what eye-watering yields might they require to accept the risk? In either event the negative knock-on effects on government debt could be considerable.
In such a scenario, steps to nationalise the banks will be necessary but insufficient to avert a crisis. Any call to nationalise the banks should be with the strict proviso that it must be without compensation to either the failed banks' share or bondholders. Otherwise, taxpayers would be taking on debts which are a huge multiple of €54bn.
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