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.”

Irish Housing Market decline continues

Irish house prices fell by 9.2% on the year in April, compared with a 8.9% decline in March, according to the independent think tank Economic & Social Research Institute (ESRI), and Permanent TSB bank. The average price paid for a new house in April 2008 was EUR 280,981, while that paid for a second hand house was EUR 278,987. The equivalent levels in December 2007 were EUR 290,296 and EUR 284,608. The full story appears here

• The 2% rise in Euro interest rates has has taken the fizz out of the market.
• The failure to radically reform Stamp Duty is a further drag on the market.
• According to figures provided to Fine Gael by the Department of Social and Family Affairs, people under 35 now make up more than half (52.9%) of the total number of people who were added to the Live Register in the past year. The figures also show that there are now 97,071 people under the age of 35 who are on the live register, the highest figure recorded since records were fully computerised in 2003 and that the number of people in the 20 to 34 age group who are unemployed has increased by 45% in the past twelve months.



• Almost 220,000 houses and apartments are lying vacant across Ireland
  New housing starts are expected to drop to 45,000 as confidence has ebbed away. Indeed this figure may be optimistic.


• House price inflation skyrocketed in recent years. Houses have been priced out of the reach of large segments of the middle class. The salaries of teachers, guards and nurses are insufficient to purchase houses.

The correction in the market has not completed its course. There is evidence that many potential house purchasers are holding off confident in the expectation that a further sizeable reduction is in store. Indeed with EU inflation rising to 3.6% -up from 3.3% it appears unlikely that the ECB will reduce interest rates in 2008.
2008 is developing into the annus horribilis for the Irish property market.

Ireland-Exchequer Deficit Blues

Ireland will have a deficit of €1.62 billion this year, compared with an Oct. 2 forecast of €1 billion, according to the Department of Finance. This contrasts with a budget surplus of €4 billion just a year ago.

The Government must bear much of the responsibility for the deterioration in the public finances. In 2007 there has been a 13% growth in the rate of public expenditure as FF and the PDs wooed the electorate. This paid political dividends as the FF/PD government duly returned to power with the support of the Greens and Independents. Already many of the FF election promises have been binned. Prior to the 2002 General Election the FF/PD government allowed public expenditure to escalate out of control. In the immediate aftermath of the 2002 General Election FF Finance Minister Charlie McCreevy set about reigning in public expenditure and introduced a raft of stealth taxes. He failed to index income tax allowances thereby pushing large numbers of PAYE tax payers onto the higher tax rate. Prior to the 2002 Election FF and PD Ministers denied that there would be public expenditure cuts.

A similar scenario to 2002 has now unfolded in 2007. The Government will once more cut public expenditure and introduce stealth taxes. Over the next 2/3 years it will build up a a financial war chest. As the anticipated 2012 General Election approaches public expenditure will once more mushroom. Brian Cowen and Dermot Ahern -during the 2007 election campaign -strongly berated Richard Bruton(FG) Finance Spokesman when Bruton drew attention to both waste and rocketing government expenditure. He can now claim retrospective vindication. Many in the media have spoken of Cowen in messianic terms.

In less than two years the ECB has raised Euro interest rates by 2%. This has knocked some of the fizz out of the housing market. Stamp Duty receipts have slumped and lay offs in the building industry are increasing rapidly. This crisis has been exacerbated by the failure of the Government to reform stamp duty. House prices are falling and negative equity looms on the horizon. Mortgage debt in Ireland is now €136 billion. There is also an astronomical level of credit card debt.

New house starts may fall to c 55,000 in 2008. The huge slump in property tax receipts looks set to continue in 2008. In addition a tightening up of bank/building society lending policies will further restrict the amount of credit available to house buyers. For too long the government has been over reliant on taxes from the property market to boost public expenditure. One eighth of the workforce is employed in construction. 20% of private sector workforce depends on construction.

Rising energy costs will reduce economic growth.This has implications for unemployment which is already rising. Rising unemployment will further depress tax receipts and damage consumer confidence.

For FG and Labour this was the election to lose.