Latest IMF report on Ireland: the NAMA situation

Yesterday the IMF published a raft of papers following its review of progress in our bailout programme, when it was here with the Troika at the start of January – that was when Vincent Browne harangued them, how time flies. The main report, the staff report, was broadly positive about progress objectives being met, and in places exceeded. It is becoming obvious however that the thrust of the IMF’s interest inIreland is that the country meets its deficit reduction targets. A secondary concern is about debt sustainability and the IMF “mission chief” for Ireland, Craig Beaumont certainly gave the most upbeat external assessment of Ireland’s attempt to manage the debt incurred as a result of saving the banks.

But it is beginning to become unsettling to see scant regard paid to reform progress – remember there are three headings under which Irelandwill recover from the financial crisis (1) austerity which involve more taxes and cuts to services (2) economic growth and (3) reforms. Under the “reform” heading, for example, the bailout agreement stipulated Irelandhave a Fiscal Advisory Council by mid 2011, and yet seven months later the Council hasn’t the authority of legislation because the Government decided to bundle the provisions for the Council in with the fiscal compact. The Council has reported once on economic matters, and whilst the report was acknowledged by politicians, the recommendation of a bigger upfront fiscal adjustment was ignored. Yet the IMF gives this stipulation of putting a fiscal council in place a “big tick”, as if it’s done and completed.

With respect to NAMA, there are a couple of references to NAMA in the IMF staff report and the IMF mission chief for Ireland yesterday spoke about our residential property market which is germane to NAMA.

(1) The IMF says “NAMA’s asset sales exceeded target for 2011, but softer real estate prices will dent its financial results. Sales of €4.4 billion in 2011, primarily of assets located outsideIreland, exceeded the target of €3.1 billion. However, weaker real estate prices in theUK, US andIreland will be reflected in accounting losses on the remaining portfolio, detracting from NAMA’s 2011 financial performance. Following a recent external review of NAMA, an Advisory Group is being established that will report directly to the Minister for Finance.”

Well, this is the first time that I have seen a “target” for NAMA sales for 2011. There’s no such target in the 2011 Annual Statement which was supposed to show targets to be achieved by the Agency in 2011. The €4.4bn looks correct in terms of actual NAMA disposals. The impairment charge which totaled €1.485bn in 2010 and which is estimated at about €1bn on here for 2011 is referred to by the IMF as “accounting losses”. NAMA refers to the impairment charge as a “paper loss”. But as NAMA proceeds though its life-cycle these “accounting” or “paper” losses will hove into view as big bad cash actual losses. It’s also worth saying again that despite the NAMA chairman Frank Daly’s claim that the Agency’s target first shown in its business plan of June 2010 of paying down 25% of its debt by the end of 2013, and Frank saying this target had been “copperfastened” into the bailout agreement – “we have a clear target, which was originally NAMA’s but has now been copperfastened by the troika, of realising a sum of €7.5 billion by 2013” – I still can’t see any reference to it as a contractual target, and NAMA has declined, on a number of occasions, to point to the alleged stipulation.

(2) Under the heading “However, the debt path remains subject to significant risks:” the IMF says “Recognition of contingent liabilities would constitute a one-off increase in the level of debt. Ireland’s contingent fiscal liabilities relate to the covered banks, the IBRC, and NAMA. There is no expectation of losses from these entities as the covered banks have been recapitalized under PCAR 2011, the IBRC meets capital adequacy requirements, and NAMA received assets at heavy discounts—averaging 58 percent—to protect its viability.”

So because NAMA has imposed such severe losses, the IMF thinks there is no “expectation of losses” at the Agency! Of course none of us has a crystal ball to allow us to see into prices of Irish property in particular in the second half of this decade, and for the little it’s worth I think prices may well recover at a rate which covers NAMA’s operating costs and interest payment obligations later in the decade. There are other views that NAMA will rack up substantial losses. Who knows? But what we do know is that NAMA lost €1.1bn in 2010 and is expected on here to notch up a multi-hundred million euro loss in 2011 after impairment charges. So in the spirit of “we are where we are”, we already have NAMA showing losses. So the IMF’s claim about “no expectation of losses” is curious. That said of course, the IMF will have long since gone by 2020 when NAMA is wound up, so any claim is low risk on the part of that organization.

 

(3) Our IMF “mission chief” Craig Beaumont gave an interview to the inhouse IMF “Survey” which was published yesterday in which the following exchange took place “IMF Survey online: Housing prices have been almost halved compared to their peak in 2007. How much further will they have to go, and what can be done to arrest the decline in the housing market?

Beaumont: Irish house prices rose dramatically until 2007, when the crisis hit. They have since fallen by 48 percent from this peak, including by more than 17 percent during last year alone.

There is relatively little turnover in the market, as potential buyers worry that prices may fall further, and mortgages are more difficult to obtain. But indicators such as house prices relative to incomes are returning to more normal levels by historical standards. So while we expect some further decline in prices, this should bottom out when values become sufficiently attractive.

Reforms to strengthen the banking sector will eventually encourage more lending, which will also help stabilize housing prizes. Finally, the household insolvency law is being modernized, including new out-of-court procedures to address the debt distress of some households, and this should also facilitate a recovery in the housing market.”

We should possibly appreciate the apparent fact that Craig keeps abreast of Irish property price indices – the 48% decline from peak presumably comes from the CSO’s index published during the week. But would you really be confident we’re getting the IMF’s “A” team with such trenchant analysis as “while we expect some further decline in prices, this should bottom out when values become sufficiently attractive”?