Tuesday, 6 October 2009

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.


Anonymous said...

Sorry, but ignoring the actual number crunching, isn't there an inherent flaw in the base logic here?

The questions/suggestions put forth at the start are as follows: the McCarthy Report on cost cutting in the public sector is at least materially due to NAMA, this being the case because NAMA is overpaying for the assets of the troubled banking sector, and so incurring short term losses in the hope of regaining them over time?

While NAMA does indeed 'pay' above market value for the assets up front (ie now), this will be via a non-cash method (and will probably be 'off balance' sheet in terms of the national debt). It will be exchanging directly the assets of the banks for either NAMA issued bonds, or possibly general govt debt. As such, there will be no cash 'profit or loss' (and therefore no "short term losses") until those bonds are actually redeemed by the banks, at a date likely to be well into the future. As such it cannot and does not impact on the short term fiscal funding of the state deficit (although any effect on funding costs of the State would have some impact). As such, i don't see how NAMA could be seen to be causing the suggested cut in public services. Moreover, given that the public sector pay bill is €20bn and social welfare costs are €23bn, a €7bn or so overpayment for long terms assets (ie 10yrs) needs to be compared against the roughly €400bn that will be spent on the public sector and social welfare over the same time frame!

Martin O'Dea said...

May I scream agreement. It is not easy or natural to rail against the status quo, and the assumption that it will all be alright somehow pervades. However, NAMA seems to be manifesting itself as a form of contract on the maintenance of that status quo for an awful long time.

One may argue that there should be a political change to allow the public conscience to separate itself and recognise a new juncture with new opportunities; oe might also argue that if the ECB was offering us 1.5% interest rates and we owned a couple of banks as collateral wouldn't we at least be separating ourselves form the industry (construction) most involved in the artifical economy that has just imploded - and, of course, why don't we borrow another four billion on the back of those banks for the purpose of closing this deficit; and the circular arguement as to whether this current deifict is affected by that borrowing; and if so how is it not affected by NAMA.

Aside from all those insecurities NAMA is going to tie the hands of the next government. If a government emerged that would focus on growth and entertain a new paradigm they would be stymied by this uncertain ploy that is to be voted on so soon.

The most dangerous element of all of this is that people feel that there is nothing they can do about it. There is nothing they can do about Roddy Molloy, nothing they can do about John O'Donohue, about NAMA and pay cuts and social welfare cuts; and so they will naturally become more and more disenfranchised as this government hold on for dear political life. The danger then, as you say Sli Eile, is that some grouping of psychosexually underdeveloped and intellectually fustrated muppets come together from way over at the left or right verge; and they promise to 'do something about it'.

Brendan said...

Deliberate overpayments delays recovery in two ways.First within the property market distortions occur preventing clearance of existing stock. Secondly every billion overpaid means less resources for investment in infrastructure/ future recovery programme

Martin O'Dea said...

If Fianna Fail won a mandate in January and proceeded to murder all baby girls born after June what option would remain for the electorate. If a political party drops as drastically in polls to the point where there were effectively no support (as we could assume in the above scenario) the realisation of winning no seats would reinforce sitting Fianna Fail TD's steadfastness in not going to the people until some of the hatred abated and they felt that at the end of their term they might find ways to get the electorate to forget the murders or 'necessary population constitution redress'
The reality is that I do not want this government to implement NAMA.
I am one of over 80% who do not want this government to remain in power. I feel that this government is siging off on an agreement that will probably have a continuing constraint on policies and plans for our future.