Thursday, 17 December 2009

NAMA debt

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.


Ronan L said...

At this stage, one can only hope that when the NAMA team sit down with each loan, they ignore the averages given by Minister Lenihan in September and drive a hard bargain on a case by case basis.

My estimates are that if they did that, they'd come up with a long-term economic value much closer to €40bn than €54bn.

What odds, though?!

53degrees said...

It is clear now that NAMA is so politically compromised that even it makes a good start at asset valuation, its long term project is shot through with a confusion of intent.

Paul Hunt said...


There are hints that the haircut may be sufficiently severe to drive the transfer value towards your estimate. But that would require an additional recap of €14 billion. Where do you think this will come from?

Ronan L said...

@Paul Hunt
A recapitalisation by any other name...

At least if we're all honest that it's a recapitalisation, rather than the 'fair price', the Irish taxpayer will get *something* in return for the money, above and beyond the right to own the debt.

Paul Hunt said...


I think you may have misunderstood the intent of my question. We are agreed that any transfer value below the infamous €54 billion will require additional recapitalisation. I'm just interested in where you think this additional money will come from. Further draw-down of NPRF (how many times is this going to be spent?), additional borrowings, something that would strike fear into the hearts of the "progressives" here - privatisation of semi-states, or some conbination?