Archive for December 10th, 2011

On Tuesday last 6th December 2011, on the evening after the conclusion of the Budget 2012 announcements, Minister of State (otherwise known as a “junior minister”) at Ireland’s finance ministry, Brian Hayes appeared on the Vincent Browne show to defend the budget announcements.

Budget 2012 is the fourth austerity budget inIrelandfollowing the financial crisis in late 2008, and it fell to the junior minister to justify the latest measures. Not surprisingly, the junior minister came under attack from political opponents and others, and reacted with the well-tested tactic of counter-attacking his tormenters and challenged them to produce a better way of dealing with our gaping budget deficit. “We’re bankrupt!” he declared before inviting suggestions. “How would YOU make the adjustment”

The junior minister earns a headline annual salary – before expenses, allowances, benefits, pensions, perks – of €130,042 (USD 174, 256, GBP 111,147).

Poor Brian is obviously troubled by the financial mess the country is in, and the following are imaginings of how the junior minister frets over finding a solution:

“What to do, what to do, what to do” he might ponder, knowing he would be entitled to a €30,000 golden handshake if he were to quit his junior ministerial role tomorrow despite only holding it for nine months

As he paces his office going almost cross-eyed with the mental exertion he might at least be comforted by the fact that he gets €12,000 per annum as a so-called “public representation allowance” for which he doesn’t need provide receipts.

“Think man. THINK!” he might urge advisers, safe in the knowledge that he doesn’t even have to declare entertainment gifted to him by others

As he wakes in the middle of the night in cold sweats, he might at least be able to return to sleep when he remembers the ministerial pension he will be entitled to if he survives in post for two years, otherwise he’ll have to make do with an ordinary TD’s pension.

“Is there NOTHING at all to be said for re-visiting the decision to pause the young person’s disability allowance” he might muse as he continues to be entitled to a civilian driver and car allowance.

Now Brian Hayes, the TD for Dublin South-West has according to the latest Dail register of interests, no occupational income, no shares, no directorships, no declared gifts, no remunerated positions and his only property aside from his residence is an apartment in Clontarf which he rents out. That was the position in 2010. Compared with some other TDs, his non-political income is modest.

There is a comparison of the headline salaries of our own senior politicians and their non-bankrupt UK counterparts here. The UK is also noteworthy because last week Prime Minister David Cameron made his ministers accept an effective paycut of GBP 4,129 (€4,830) by forcing them to make bigger personal contributions to what the Daily Mail called “gold-plated pensions” The loot bagged by our politicians has also raised eyebrows in Germany; this is a report from 2009 before the country needed a bailout from the IMF.

(Graphic above produced by Japlandic.com, with other examples of artwork available here)


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Three of the main Irish news outlets today report that NAMA is set to make a €600m “profit” in 2011. This follows a presentation by NAMA CEO, Brendan McDonagh in Londonyesterday when he gave an update on the Agency’s progress (*, see below). There was a reference in Brendan’s presentation to NAMA being on course to make an operating profit of €600m in 2011. With the honourable exception of Simon Carswell in today’s Irish Times – and even he might have made the matter clearer – the rest of the Irish media give the impression that NAMA will be profitable in 2011:

“NAMA boss says agency will make €600m profit this year” headline in the Irish Independent

“NAMA .. on course to make trading profit of €600m this year” with a photograph of the NAMA CEO with the caption “Brendan McDonagh says NAMA expects €600m profit this year” at RTE


Why is this misleading? There is a difference between an “operating” or “trading” or “gross” profit, on one hand, and a “net profit” on the other – the usual difference is the former will exclude the effects of exceptional events, or costs/income that are not directly associated with the main business of the company or sometimes “paper” profits or losses. So NAMA’s operating profit will INCLUDE interest received from borrowers, interest paid by NAMA on its bonds, profits if loans are redeemed or sold at more than NAMA paid for them, losses if NAMA sells loans for less than it paid for them and NAMA’s administration expenses but will EXCLUDE losses when revaluing remaining loans because the underlying property has fallen in value, and dividends paid to the so-called “independent” third-party investors.  The calculation of losses on NAMA’s existing loan-book takes place only once a year at year end, and the loss is known as the “impairment loss”. It is excluded from operating profit; for example in 2010, NAMA made an operating profit of some €400m but there was an impairment loss of some €1.5bn which mean that NAMA overall made a loss of €1.1bn in 2010.

How much of an impairment charge will NAMA take this year? Well up to last weekend, I would have said something in the region of €1bn on the basis of falls in the Irish market in particular in the past year, and anaemic and mixed results in other markets. So the €600m operating profit might have become a €400m net loss.

But Minister Noonan’s announcements on Tuesday in Budget 2012 might materially change this with respect to Irish commercial property valuations. Three measures announced – the reduction of stamp duty from 6% to 2%, the binning of efforts to deal with Upward Only Rent Review (UORR) leases and the softening of rules on Capital Gains Tax – all tend to boost the value of Irish commercial property. By how much? I would have said by 10-15% on the basis of the 10%+ falls in 2011 that have been attributed to uncertainty over the UORR issue, and the reduction in stamp duty effectively increases prices by 4%. With NAMA having €9.25bn of commercial property by reference to November 2009 values, which has dropped by 30%-odd so far if you strip out Long Term Economic Value and the 20% fall in values since November 2009, I would estimate NAMA’s commercial property to be worth €6-7bn today; so a 10% increase may give a €600-700m clawback from the €1bn estimated impairment charge that NAMA was carrying up to last weekend.

If NAMA had to book a €1bn impairment loss then the betting on here was that the Agency would have required additional capital – a bailout for NAMA! So Minister Noonan’s announcements might just have saved NAMA’s skin, and in the 12th month of the year. Dramatic stuff!


* NAMA’s update on progress:  Friday 9 December 2011

–  approved the sales of assets totalling €6.2 billion, with €4.3bn approved Jan-Oct 2011, and €1.9bn in 2010 and 80% located outside Ireland.

– on course to make an *operating profit* of €600 million in 2011;

–  approved 63 insolvency appointments so far this year compared with 30 in 2010;

–  likely to redeem a cumulative total of €2 billion in NAMA senior debt before the end of 2011. NAMA had redeemed €1.25bn of its bonds to the end of September 2011. These bonds cost NAMA approximately 1.7% (1.2% next year following recent ECB interest rate reductions) so NAMA is handing over cash effectively to the ECB – by “effectively” I mean the banks who were given NAMA bonds in return for their loans exchange these bonds with the ECB for cash – to redeem bonds that cost the Agency very very little. The view on here is that this cash would more usefully be deployed in the Irish economy as NAMA bonds don’t have to be redeemed until 2020.

–  generated over €5 billion in gross cash receipts to the end of November 2011 and approved €950 million in new loans to complete development work in progress.

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