Nama Bonds - default friendly by design..

While reading this very interesting posting

nakedcapitalism.com/2010/02/rogoff-foresees-a-wave-of-sovereign-debt-defaults.html

and the original Bloomberg article and evil thought struck me - maybe some of the more puzzling facets of the structuring of NAMA really are there by design and not the result of semi-random ad-hoc’ary.

What I got from the piece is a sense that among the international the great and the good that its not a matter of if but when Ireland (and others) declare partial or full sovereign default. If this outcome is the unavoidable then how convenient that the biggest block of debts and losses of the Irish ruling class are being quickly packaged into a form that is very “restructuring” friendly in the case of a sovereign default.

This would also solve the mystery of why the government did not push for a Basel II exemption for Irish banks when they went belly up. Why go through all the pain of trading through your losses for a decade of more when you can package all the worst of the toxic sludge into a form that will quickly get “restructured” down 60 % plus ( if the South American crises of the 1980’s is any guide) when the inevitable default happens. Plus when the debt gets redenominated in the new soft-euro currency, which it will as part of a global solution, then the final “restructuring” maybe somewhere north of 80% plus.

Now that’s what I call financial engineering…

Wouldn’t this require the Irish banks to sell on their NAMA bonds? Otherwise a partial default of NAMA bonds would sink the banks.

The bonds would not default but they would be included in a general restructuring plan. I 'll see if I can dig up any online details of the various South American sagas back in the '80’s but I have a distinct memory of a lot of debt directly or indirectly guaranteed by the state that was not in technical default ending up being written down. And as we are talking crony capitalism in both situations I thought it may be the real model for NAMA.

Thanks jmc,

If “restructuring” is a euphemism for bonds not being paid in full, then it’s a problem for those bondholders :wink: If such a restructuring is part of the NAMA design, it would be better to fund it through 3rd parties rather than using Irish banks’ balance sheets.

Should the Irish banks hold 50bn nominal in NAMA bonds but the restructuring results in the bonds being worth 30bn, this would cause a significant hole in their balance sheets.

An Irish default is a real possibility, though I don’t think it will be by design. In fact, you could make a case that NAMA will make a partial sovereign default more difficult as it would also destroy the (balance sheets of) dependent banks. The only way around this is for Irish banks to sell on their NAMA bonds.

Or repo them? :angry:

Everyone likes a bit of free money / debt forgiveness, but a Repo agreement is a promise the repurchase. If the bank still exists, the promise to repurchase still exists.

Pulling a fast one via Repo would require the agreement of the ECB.

That’s my point. As I said, as jmc made posts about sovereign default possibilities in the other thread, the key is who holds the debt.

EDIT: Apologies, it was a YM thread actually… → viewtopic.php?f=19&t=28531

Fair enough TUG. Once it’s clear that assets sojourning at hotel ECB still effectively belong to the bank, I’m happy.

Thinking about it a bit more, the ECB would need the approval of the EU commission. I think they missed a trick last year when an ECB QE exercise could have funded a eurozone distressed asset purchase programme. Otherwise the link between a bailout and the German taxpayer is a bit problematic.

Not if you consider that it is the German taxpayer who is being bailed out (the German saver, anyway)… who normally loses more when someone can’t pay a debt? The person who can’t pay, or the person who loaned them the money?

Its amazing how quickly things shift when a sovereign default scenario starts playing out. At the moment the government cannot try hard enough to avoid the banks being nationalized but the moment the default cascade starts in another of the walking wounded countries (Ireland is very unlikely to be the first trigger) then watch the banks being nationalized in short order. As will all the other defaulters.

Now guess which country already has its a big chunk of its bank debt already prepackaged in a form that makes it very amenable to the restructuring process as played out in South America in the 1980’s. Because I think that will be the model for dealing with the coming sovereign debt crash, South America in the '80s not South East Asia in '97/'98.

I wonder who first proposed the idea? The boys from Merril Lynch, Rothschild or HSBC?

Its interesting watching the dynamic of what is playing out in Germany at the moment. The Germans will bail out German banks eventually and with much bad grace (but the case for Deutsche Bank is iffy) but I think that is as far as it goes. So I expect most of the bill for Irelands default to fall on German, French, UK taxpayers for their own banks with the Irish taxpayer taking up the rest. A very large rest I might add. Probably a 25% of GNP rest.

By this stage there are no viable options that are not terrible.

There’s the one that dare not speak its name… ECB creation of specific categories of debt - call them perpetual zero coupons if you like - to be swapped for bad bank bonds for each of the national bad banks. All they do is provide regulatory capital - so the banks get to have 8% Tier 1 cash without actually having to have the cash for it, the ECB gets the NAMA-type assets paying euribor+0.5% (so it is not a free bailout, just a cheap one), the banking system is given a base level.

I would guess there are a couple of sticking points, though. The worst of the banks must be busted, broken up and rebuilt. This may not just be our busted banking system, this may have to happen across Europe. This is not going to be popular. A lot of people are going to find they’ve lost a lot of high yield stuff - madly enough they will squeal like pigs despite it being high-yield!

So I think what is going on is an allocation of losses with an ebb and flow between just shareholders, shareholders+subordinate debt, or all categories of debt with increasing losses and decreasing equity (so existing shareholders lose 99%, subordinate debt loses 60%, senior debt loses 30%, some random configuration like that). NAMA is being delayed by the EU because this is the model that will be used in Spain, Germany, maybe France, the UK?

What has thrown a spanner in the works is, I think, Greece, because it faces a sovereign crisis not a banking crisis. Were it not for the banking crisis here, we could afford the deflationary path we are on with the hope of some stimulus at the end of it (the structural deficit) to hopefully kick things off.

An idea that makes perfect sense financially but is politically a non starter. The Euro was born as a purely political beast and it will die though a purely political process. By this stage its all going to be politics, which is why I dont foresee any non-terrible solution.

If you cancel the debt you alleviate the burden on the German taxpayer quite substantially and make the Eurozone more competitive into the bargain… We need oil for the time being but otherwise… :angry:

Germany will finish paying WW1 reparations this October. I don’t expect any easy debt forgiveness. If Ireland was alone in its troubles, then the scale of the problem is such that it could be looked after without much pain being felt by others. Though it might have cost us our low corporate tax rate.

As a number of eurozone countries are in trouble (for a variety of reasons), the NAMA debt structure won’t entitle us to preferential treatment. I don’t believe a secret PIIGS bail-out plan is in place. A future bail-out may be patched together, but (politically) this may only be possible during a serious crisis.

NAMA pretty much turns bank debt to sovereign debt. It’s much harder to default on sovereign debt. I’m sure you could create a conspiracy from that :wink:

Damnit CaveCanem we’re buying assets not liabilities! :stuck_out_tongue: