Wednesday, September 16, 2009

Ireland: NAMA To Purchase Loans from the banks with bonds secured by the Irish taxpayers

NAMA is a semi state body set up by the government to purchase commercial and development property loans from the banks. NAMA will purchase the loans using government bonds. In short the Irish taxpayer secures the bonds.
The Irish government, under the aegis NAMA, will pay interest on these bonds to the Irish banks at initial rate of 1.5 % interest.

NAMA will pay somewhat more to the banks for the loans than their current market value, by endeavouring to estimate what the property underlying the loans will worth in five to seven years’ time, by which time it is anticipated that a recovery may have set in. The current “market value” (the actual value) is €47 billion. But the State is going to pay €54 billion - some €7 billion on top of the current market value and 70 per cent of the book value. The problem with this is that the property market may fall further. It is also possible that the property market may not recover for a prolonged period of time. If this transpires the banks will have been overpaid for the loans and the taxpayer will be left with assets, which are worth much less than it paid for them.

The ECB will lend to the Irish banks. The government-backed bonds will secure this lending. In short the Irish taxpayer provides the collateral. The taxpayer is liable for the principle and interest on these bonds.

The ECB will NOT lend to NAMA. To do so would contravene Article 101. Sean Fleming TD-on Six One News and Willie O’Dea Minister for Defence on Morning Ireland have claimed that the ECB is funding NAMA. Their assertions are factually incorrect.
The Irish taxpayer is taking the lions share of the risk. This has the potential to go seriously wrong. Quite frankly the state will pay too much for the assets. Already Bank of Ireland and AIB shares have risen sharply today with Mr Lenihan's announcement. Good news for the banks. But what about the poor taxpayer?

According to Richard Bruton:
“The Minister is asking us to give a commitment of €54 billion, €30,000 for every household in the State,” “The taxpayer is being asked not just to buy impaired loans from the banks. We are being asked to pay billions more than the market value for them. Remarkably this extraordinary act is being done without any forensic analysis of the costs and benefits, of the risks and threats.”

6 comments:

Wild Gypsy said...

John Barry, I was reading a couple of articles on The Automatic Earth blog the other day -->

Rumble in the Number Jungle

Here are the article links:

Ireland's bad debt loan plan meets opposition

and

Irish bank shares surge on government bail-outs

I assume this the same NAMA plan and a similar strategy that the US has employed with TARP? (By that I mean socializing the risks and privatizing the benefits)

How could that possibly benefit Ireland?

I would love to hear more from your opinion!

Wild Gypsy said...

Oooooops! Sorry the first article link got a bit messy. The url is http://online.wsj.com/article/SB125311571323816197.html

Hope that works better.

Wild Gypsy said...

Okay, one more try here

Ireland's loan plan meets opposition


Hope that works because I feel like I am scribbling all over your nice blog, LOL!

John Barry said...

"NAMA will pay somewhat more to the banks for the loans than their current market value, by endeavouring to estimate what the property underlying the loans will worth in five to seven years’ time, by which time it is anticipated that a recovery may have set in."
This appears to be crazy. There is no guarantee that property prices have reached the bottom at all. It is quite possible that the loans purchased by NAMA could end up being worth only 30-35 billion. If anything like this transpires the Irish taxpayer will be paupered for the next 10 years.
Essentially the Irish taxpayer is bailing out the banks-through NAMA- on the basis that we need a functioning banking system. There is no guarantee even if NAMA goes through that banks will lend in sufficient amounts to revive the Irish economy. The banks will consider no 1 and invest overseas if returns are better. The stockbrokers and bankers and builders are laughing at the taxpayers.
Essentially NAMA will be the worlds largest construction company. Many of the loans that will be taken over by NAMA will be on property and sites which are practically valueless. Some towns have sufficient rezoned lands to last for the next 40 years. Builders have bought these at astronomical prices. Now because of oversupply they are no more valuable than agricultural land. Ireland already has a massive glut of new houses.
Essentially we have the socializing the risks and the privatizing of the benefits.
NAMA can only succeed with a new property bubble. Who wants this?
Thanks for the links. I will look at these.

John Barry said...
This comment has been removed by the author.
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