Archive for June 22nd, 2010

The UK emergency budget and NAMA

NAMA has indicated that about €22bn of the €81bn of gross loans that it intends acquiring are secured on property in the UK – about €5bn in Northern Ireland and €17bn in Britain. So NAMA needs to keep an eye on events in the UK, political, regulatory and economic.

Today sees the presentation of what has been widely billed as the most draconian budget in decades, created by the newly installed Tory-LibDem coalition, in particular Chancellor George Osborne and Chief Secretary to the Treasury Danny Alexander and their new creation, the Office of Budget Responsibility (an independent body whose objective is to advise economic parameters and to assess government policy in light of economic targets. the basic problem is the UK has a spiraling budget deficit – €155bn current estimate, and the new administration has signaled this is to be tackled head-on and now.

Many pundits believe there is little point to the new Chancellor delivering the budget because of informed media reporting beforehand. Here’s what the betting is and how it might affect NAMA.


Whilst the budget is intended to restore stability to public finances and eliminate the structural deficit, there is concern that it might lead to a double dip recession, in particular by reining in public sector pay and conditions. A further economic deterioration would not be helpful to NAMA in the short term, particularly as it has been reported that assets in the UK may need to be disposed of, sooner rather than later. On the other hand, the budget should signal to the UK’s lenders that the UK is a responsible place to do business and not a risky destination for loans. Most near term forecasts predict that sterling will strengthen by 5-10% against the Euro which today stands at GBP 1 = EUR 0.8335 . Perhaps the independent Institute for Fiscal Studies will be the body most looked to after the budget to see what they have to say on this budget’s effect on planned GDP growth. Of course any event in the UK might pale into insignificance compared with actions within the Eurozone.

Capital Gains Tax

The coalition has pledged to “seek a detailed agreement on taxing non-business capital gains at rates similar or close to those applied to income, with generous exemptions for entrepreneurial business activities”.  NAMA has had almost two months notice that CGT was likely to rise for “non-business capital gains” so if there was any need to clarify an assets status eg by transferring it to corporate hands to make absolutely clear that it was a business asset, then that should have been done before now. There is the possibility that there will be convulated exemptions and inclusions so this is still an area for NAMA to monitor. If CGT is set at a high level for personal property sales, then this might discourage people placing residential property on the market which might drive up prices for NAMA residential developments in the UK. UPDATE: from midnight tonight personal capital gains will be taxed at 28%, up from 18% presently.

Corporation Tax

There appears to be a will to reduce the UK’s corporation tax burden and indeed there have been mutterings that certain areas, such as Northern Ireland, might get special designation and have CT set at lower rates immediately. Possibly more importantly for Ireland, rules regarding foreign controlled companies (where you get a minimal HQ set-up here or possibly just some nameplate office in the IFSC so that revenues can be channeled and taxed here at 12.5%) may mean that some companies return to the UK or transfer there if the foreign control rules are relaxed – after all, the UK otherwise appears to have better corporate regulation and enforcement. This could see some retrenchment in demand for Dublin office space though any ripple in the UK pond is unlikely to be significant.

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The Chinese famously have the concept of Si Da Jian (“four big things”) which are possessions that are commonly sought after by the ordinary man (and woman). And the table below shows how these objects of desire have changed over the years.

And just as young Changs and Meis have their hearts set on possessions, so do our own Oisins and Niamhs. And just like their Chinese counterparts going forth in the world, cars, appliances, homes and gadgets are very important here. Of course with the younger consumer wanting to acquire all of these at once and without savings or the best paying job, credit is often a necessity. So a mortgage for the home and personal loans for cars and furniture are not uncommon. Of course credit isn’t just for the youngsters but people famously tend to rein in discretionary spending as they get older and savings, existing assets and better jobs mean that purchases can better be paid for in cash.

Up to now, Ireland was one of the few countries in Europe not having a system to place overall limits on  the overall credit exposure of an individual. All of this may be set to change with the announcement, reported by the Independent today, by the Financial Regulator of a proposal to set a cap on credit exposure.

What this is likely to mean  is that home loans offered by banks will tend to reduce in value and indeed in some cases, the scale of existing (unsecured, and generally for fast depreciating goods) credit will mean a  refusal for any mortgage.

It is of course a responsible step – no state wants to see its citizens so recklessly overstretched so as to be unable to meet credit commitments and then face financial ruin. However, a consequence is likely to be a reduction in the sums available for home purchase, particularly to First Time Buyers who are most likely to have other credit commitments and where consumer products and services and cars may be a higher priority than a home purchase. This will tend to depress home prices and given the significance of First Time Buyers to the market – they made up the biggest segment (33.5% of the total) of mortgage lending in Q1, 2010 – the effect of the introduction of the credit monitoring system could seriously impact home prices particularly at the lower end of the market.

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Although the first tranche of NAMA loans from AIB attracted a 42.25% haircut, it has emerged in today’s Independent that the Financial Regulator, Matthew Elderfield has directed the bank to plan for a 45% haircut overall when demonstrating how it will meet new capital rules by the end of this year.

Given that AIB transferred €3.29bn of gross loans in tranche 1 and was expected to transfer €23bn overall, this would indicate a haircut on remaining tranches (including tranche 2) of 45.5%.  Of course the Regulator might be just being prudent – time will tell.

Separately, last week in the Irish Times, Simon Carswell said that the Financial Regulator has put on hold the need for Anglo and INBS to produce capital plans pending the outcome of a review of restructuring plans for those two institutions at EU level.

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