The Day after NAMA … how the world has changed

Well, apparently we’ve printed NAMA bonds to the value of €370m and given €280m to INBS and €90m to EBS – we don’t know if the EU/Regulator/Ernst and Young or the sometimes mooted EU investment bank will make INBS and EBS hand back some of those bonds as a claw-back or if the payments are subject to the valuation dispute procedure which again could mean that INBS and EBS hand back some bonds if the valuation panel determines a higher value and NAMA says “feck it! you can have your asset back”.

So what has changed today? In terms of credit availability at INBS and EBS, not very much and nor should we expect it to. Remember what AIB and BoI told the Oireachtas Finance Committee late last year – NAMA would not in itself directly lead to more credit. Eugene Sheehy, Chairman, AIB came before the Oirechtas Joint Finance and Public Services Committee on 25^th November, 2009 and gave this response to how the banks will handle the NAMA bonds.

With regard to the funding and what will happen the day after one receives a bond from NAMA, nothing will happen other than that a bond from NAMA will replace the assets one had on one’s balance sheet, many of which were earning marginally. However, the quality of the bank’s balance sheet will be vastly improved because it will have a bond which is recognised domestically and internationally as a repossessable asset. However, one will not generate any additional liquidity by repossessing it. It is not a supply problem; it is a matter of the banks being able to find risks that are appropriate to the amount of risk they can take with their capital

What has happened to employment in the State? In particular has NAMA decided that it will start releasing some of their €5bn development pot into the construction industry (and given that this €5bn doesn’t go on National Debt, I would recommend they give urgent consideraton to whether they can release any of these funds early).

What has happened with “chasing the developers to the ends of the earth” as Brian Lenihan said on Prime Time last night? Well until the developers produce their business plans in the next two months I would guess there will be little recovery action for the time being. I hope NAMA wise up pretty quickly that with ringfenced SPVs, limited personal guarantees and lawful wealth protection schemes, “chasing developers to the ends of the earth” might produce good optics but little real benefit.

What has happened to banking competition in the State. Well the signs are that not good. It is one thing for banks to say they have to increase SVRs because depositors are demanding higher savings rates – it is another thing when Ireland’s banks have overweight overheads and inefficiencies and the competition (Postbank, Halifax and who’ll be next) is leaving the field. If we do effectively control the banks their overheads should start to resemble efficient banks elsewhere.

What has happened to property values? Difficult to say because the limited figures released by NAMA are aggregated to the extent it is difficult to tease out specific examples. Prices of new properties in Dublin on DAFT this morning continue to display €500/psf and above asking prices. It will take weeks before the picture in commercial property comes into focus.

What has happened to our everyday quality of State services? Nothing in the short term but should AIB and BoI not succeed in attracting private capital and if the INBS and Anglo top end recpatisation estimates are actualised it is difficult to see how services will not suffer (or how our taxes, levies, rates will not rise).

What has happened in the attitude by the media and economists to NAMA and the recapitalisation of Anglo? It seems to be universally negative or at best neutral though questions are beginning to emerge about the economics of closing Anglo and the LEV on the first tranche.  Prominent arch-critic of NAMA, David McWilliams recalls Joan Bruton’s speech in the Dail last night and likens the Irish taxpayer to the Irish volunteer going over the top of the trenches during the Great War. I haven’t found a single economist who will stick their head above the parapet to applaud NAMA, though I think it’s fair to say we are all shell-shocked by the scale of the Anglo upper-limit recapitalisation requirement.

Have we crossed the Rubicon? Or better still has Brian Lenihan, like Xerxes, burned our boats so we have no choice but to fight on for victory? Given the parliamentary arithmetic I think we can’t change course. However what can be done is to demand detail from government and then test their policies against reality. Demanding detail means we understand what the €30bn cost of liquidating Anglo entails, it involves us demanding an updated business plan from NAMA (the fact they are spending what? 54bn with only a draft is crazy), it involves our journalists getting the nitty-gritty detail of the operation of NAMA, the credit review body and the recapitalisations and our economists and academia poring over that detail, stress-testing it, comparing it, debating it and challenging government.

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