What evidence does NAMA have that the current market price of property, land etc is in fact the incorrect price to pay?
There is no “current market price” for land and development projects because there is no market for these activities at present. Purchases of land and development projects are mostly financed using bank loans. But banks are not making new loans for land and development because past bad loans are clogging up the banking system. This means there are no buyers. That is not to say that land has no value, but rather that the market for land and development is illiquid and therefore not functioning. There is a vicious circle in operation and as a result banks are not in a position to provide the credit necessary to support economic recovery.
NAMA is not buying “property, land etc” but rather is buying loans that are secured on properties and other assets – there is a fundamental distinction. The EU Commission has set the rules on how State schemes such as NAMA should work. As members of the EU, we of course must follow these rules. The Commission is very clear that the loans are to be transferred at values based on what the Commission refer to as “long-term economic value”. This value is the amount that NAMA expects to realise over time from the loans or selling the properties on which the loans are secured. As in other such schemes in Europe and elsewhere, NAMA will not pay “fire-sale” values for assets for which there is currently no market due to a lack of liquidity.
What evidence does NAMA have that the current market price of these is not in fact going to decline for a number of years, as would be the case if Ireland were to follow the common experience of previous property crashes?
Again, there is no “current market price” for land and development projects because there is no market for these activities at present. Since NAMA can be patient in disposing of property assets that it has seized from delinquent borrowers, it is the expected price for property over a longer time horizon (say 5-10 years) that is relevant for NAMA, not near-term prices.
It is worth noting that in the case of an undeveloped site in a more remote part of the country where there is no reasonable prospect of profitably completing the development project, NAMA will purchase this loan based on the agricultural value of the land. In fact, in some cases the banks will have to pay NAMA to take assets off them (e.g. a brown field site where the cost of demolition or clean up is more than the agricultural value of the land).
Why would temporary nationalisation of the banks be a bad thing, given that this would provide the taxpayer with a valuable asset which could be sold in future years?
There is no doubt that NAMA will require the banks to bear substantial losses on transfer of the assets. This will reduce the banks’ capital. Should further recapitalisation of a bank be necessary as a result of NAMA, the Government has made it clear that any further capital injections which it has to make will be by way of equity capital. This will increase the State’s ownership stake in the bank. The extent of State ownership in the banks therefore will be a natural consequence of the price paid by NAMA for the loans it will buy. Following EU Commission guidelines, NAMA is in the process of valuing each loan separately and the actual price paid by NAMA will depend on the quality of the underlying property and other collateral. It would not make sense for the Government to preempt NAMA’s work in this regard. The entire process will be subject to rigorous oversight and audit by the EU Commission.
Why does no independent analyst support the governments view on NAMA? This includes the Swedish finance minister who ran their bad bank system, who said to the Irish Times that he “favours the more severe mark-to-market write-down of assets rather than a ‘through the cycle’ valuation.”, and that “it (NAMA) does not sound like the right solution to buy assets from private banks.” It also includes the IMF who said " Insolvent institutions (with insufficient cash flows) should be closed, merged, or temporarily placed in public ownership until private sector solutions can be developed … there have been numerous instances (for example, Japan, Sweden and the United States), where a period of public ownership has been used to cleanse balance sheets and pave the way to sales back to the private sector", in the context of saying that the likely losses for Irish banks were such as to render them insolvent.
On the contrary, the IMF strongly supports NAMA. In their recent report on Ireland they recognise that NAMA is a crucial step in resolving the banking crisis as it will deal with the uncertainty about the asset quality, in particular those relating to land and property and associated loans, on the banks’ balance sheet. The IMF and most experts agree that as long as this matter is left unaddressed, the banks will not be able to play their part in the restoration of economic growth. The IMF describe NAMA as “pivotal to the orderly restructuring of the financial sector and limiting long-term damage to the economy.” The IMF have never said that Irish banks are insolvent.
Financial markets and international commentators have reacted positively to the draft NAMA legislation. Spreads on Irish Government bonds over German bonds have narrowed to near their levels prior to the nationalisation of Anglo Irish Bank in January. The Financial Times said last week that “nine tenths of the detail of the plan are absolutely right”, its only concern being that the proposed bank levy in the event of NAMA making a loss might be too hard on the banks.
Why not force the equity and bond holders in Irish banks to take the first place in the queue to absorb the losses that the banks would have to book were current market prices to be paid for the loans made. After all, that’s what risk capital is for?
Developers and banks will be first place in the queue to absorb the losses stemming from property speculation over recent years. This is the way it should be. The Government is determined to protect taxpayers to the greatest possible extent.
Equity holders and holders of bonds not covered by the State Guarantee Scheme have already incurred very large losses – and indeed may make incur further losses. Other types of bonds that are covered by the State Guarantee are not part of the banks’ risk capital – rather they are part of the banks normal funding in the same way deposits are. These bonds include instruments such as Certificates of Deposits and commercial paper issued by the banks. The interest rates attached to these securities are usually based on short-term interbank interest rates (in the same way as deposit rates are) and do not include a premium for risk. These bondholders are usually insurance companies, pension funds, and other long-term investors.
Relating back to the previous question, it is interesting to note that both the IMF and Swedish finance minister referred to in that question have strongly endorsed the inclusion of banks’ bonds in the State Guarantee Scheme.
If the state overpays for the loans relative to current market prices, what, apart from a functioning banking system, does the taxpayer gain?
There is no “current market price” for land and development projects. NAMA will not “overpay” for loans because the maximum it can pay for the loans under EU Commission rules is the amount that NAMA expects to realise over time from the loans or selling the properties on which the loans are secured.
What percentage of book value of the loans should NAMA pay, given that current market prices for land and development properties are somewhere around 30% or less of book value?
“Current market prices” for land and development projects do not exist because there is no market for these activities under current conditions. Commentators can speculate as to the value of the banks’ loan and development book – but without detailed knowledge of each individual loan these guesses should be taken with a very large grain of salt. NAMA has this information and will value the loans using these details and in accordance with EU Commission guidelines.
If NAMA were to pay say 60 billion euro for loans that are worth only 30 billion euro, how can this transfer of a full years tax revenue to private speculators be justified in this economic time?
Again, commentators can make guesses as to what the loans are worth – but these guesses are mere speculation.
If, as is entirely possible, the loans transferred to NAMA do not provide sufficient income to meet the coupon payments of the bonds issues by NAMA, will the taxpayer, at least in the short term, not have to meet these payments?
NAMA will have its own income stream through the collection of interest due from the loan assets transferred to it. Based on information from the financial institutions, these income generating loans pay an average margin of 2% above the floating interest rate on the bonds issued to buy the assets so the income stream will be sufficient to meet the interest payments.