Regular readers of this blog will know that the view on here is that, in a financial sense, NAMA faces a bumpy future, and that it is by no means assured that the agency will break-even or make a modest profit by the time it is scheduled to disband in 2020 – remember that NAMA’s business plan from June 2010 was that the agency would deliver a Net Present Value of €1bn by the time it is wound up. The agency made a paper loss of €1.1bn in its first full year of operation, and despite the assertion by the NAMA CEO at the recent Oireachtas committee hearing that NAMA will make a €500m operating profit in 2011, it seems that further declines in property prices may more-than-offset this profit and deliver another loss for the full year. The view on here, stated on a number of occasions, is that NAMA will face a bumpy few years initially but by the latter part of this decade, prices should be rising by more than the carrying costs of the NAMA loans. But I don’t have a crystal ball, so my view that NAMA might be able to reverse its initial losses and break even, is just that – a view.
But on either side of that central view, there are extremes when considering NAMA’s ultimate result. On the negative side, if Ireland ends up on the outside of the euro, with the punt nua say, then the exchange rate initially might be set at IR £1= €1, but we will see the punt nua quickly lose its value, the betting is that it would be worth 33-66c within a short time after launch. NAMA’s debts, its bonds, are denominated in euros, so NAMA continues to have a €30bn debt. But the property underpinning NAMA’s loans, mostly property inIreland, will be transacted in punts nua, which is likely to mean NAMA runs up massive losses, illustrated below:
Irelandin the euro : NAMA assets – loans and property worth €30bn, NAMA liabilities – €30bn NAMA bonds denominated in euros
Ireland exits the euro: NAMA assets – loans still repayable in euros but property will be valued and disposed of in punts nua, NAMA liabilities – NAMA bonds still denominated in euros
Irelandin 2020: NAMA assets – loans will have defaulted as borrowers are unable to meet repayments in the strong euro currency and property is worth far less in euros as the punt nua has declined in value against the euro, NAMA liabilities – NAMA bonds still denominated in euros
That would be the nightmare scenario for NAMA. But there is an extreme scenario on the other side as well, which seems increasingly plausible as the EuroZone (EZ) confronts its debt crisis. That scenario is that the EZ decides to create more money to deal with the debt crisis now threatening its economies. In theUSand theUK, they have already expanded the money supply with so-called Quantitative Easing (QE) which has cushioned the economic downturn but pushed up inflation. The EZ by contrast has gone “cold turkey” and tried to deal with the downturn mostly through austerity. This is what a QE scenario might look like for NAMA:
Irelandbefore euro QE – NAMA assets, loans and property worth €30bn, NAMA liabilities – €30bn NAMA bonds denominated in euros
Irelandafter euro QE – property worth more than €30bn and since a rise in property prices will help loan repayments, the loans will be worth more than €30bn up to a maximum of €72bn, the face value of the loans, NAMA liabilities – €30bn NAMA bonds denominated in euros
Now for this second scenario to come about, the ECB’s primary objective of containing inflation at around 2% would need to be suspended. Politically, countries with savings and deposits would need to be convinced that QE was in the common good; creditor countries that will see the value of their loans fall in real terms will need similar convincing.
How likely are the two extreme scenarios to come about? Very difficult to say but US Treasury Secretary, Timothy Geither seems to have secured agreement to boost the dollar reserves in EZ banks which might contribute to QE. And this weekend there are reports that the G20 – the group of 20 developed countries with the biggest economies – which is meeting in Washington, is leaning towards an EZ crisis resolution which will see €1.75tn deployed in Europe to help irrecoverably-indebted nations – Greece is the obvious candidate but Italy and Ireland can’t be too far behind – default on some of their debt, and also to recapitalise banks, which the EBA said two months ago needed just €2.5bn to weather adverse risks. The obvious question, not answered in this weekend’s reporting, is from where will the €1.75bn be sourced? And how can €1.75tn of additional funding be deployed across the EZ without giving rise to QE-related inflation? So from this perspective, it looks as if the better extreme for NAMA has a higher probability of coming about. But what would that mean for the agency?
NAMA has a primary objective of maximising returns to the tax-payer. So if the agency were to sit on its assets – loans and property – and wait for QE-related inflation kick in, which might boost prices by, for the sake of argument 5-10% per annum, then it might be in the agency’s financial interest to hold onto the assets for as long as possible. This would be very frustrating for society which is waiting on NAMA to make disposals and help set a price for property in an Irish market which is all but moribund. But arguably the market is moribund more because of an absence of funding, and if there was QE then funding should become more plentiful, particularly if a large part of the €1.75tn being talked about ends up being used to recapitalise the banks.
NAMA has a self-imposed objective of repaying 25% of its debt by December 2013, but contrary to what the NAMA chairman Frank Daly says, this is not “copper-fastened” with the IMF in the sense that it is not a formal part of the Memorandum of Understanding, so NAMA might decide to amend its self-imposed targets to repaying 10% by 2017, say.
NAMA of course has to deal with the certainty of the here-and-now, but it must surely be a consideration for the agency to take account of events in the EZ and look at how the value of its assets might be affected by the strategies now emerging.
NAMA Wine Lake 