Archive for May 23rd, 2012

The position on here is to advocate a “no” vote in the forthcoming referendum on 31st May.

Imagine this fairytale scenario: July 2012, Spain’s 10-year borrowing costs rise from 6.2% today to 7.1%, the same as Ireland’s 10-year bond at the start of November 2010 on the eve of our first bailout.Spain decides that this is an unsustainable interest rate, especially when the Europe’s new emergency fund, the European Stability Mechanism is supposed to be a cheap source of official funding. At the same time, Spain’s audit of its bank loans which it has just announced shows that its banks need €200bn to cover losses on a decade-long binge of lending for property development, lending that rivalled Ireland’s.

So Spain decides to seek a bailout. How much will it need to cover its banks, it maturing debt and its deficit? Probably north of €300bn. The IMF will probably loan Spain a maximum of €50bn on the basis that the EU puts in the rest and gives the IMF precedence in the queue to recover funds if Spain defaults.

So where will the EU get €250bn-plus? Although the old fund, the EFSF will still be available, Minister Noonan recently said “the Eurogroup’s statement of 30 March 2012, provides that the ESM will be the main instrument to finance new programmes as from July 2012. Its lending capacity will be €500 billion. The EFSF will, as a rule, only remain active in financing programmes that have started before that date” So Spain would get a bailout from the ESM of €250bn.

And where do you think that money would come from?

The hope is that the ESM can borrow on the bond markets in return for guarantees from the countries that contribute to the ESM. In addition to guarantees, ESM countries like Ireland will have to contribute an overall total of €80bn to an initial pool of cash – Ireland’s contribution will be €1.27bn – which will assuage the fears of lenders who we hope will lend to the ESM fund at the same rate they charge Germany. We’re hoping that lenders will provide the ESM with up to €500bn of cash loans.

If all goes to plan, in the above scenario the ESM will raise €250bn from lenders and will in turn lend the €250bn to Spain. The ESM will charge Spain an interest rate which covers its costs – what the ESM has to pay ITS lenders and the ESM’s operating costs – and “an appropriate margin”. All fine and dandy so far.

But again in our fairy tale, let’s imagine that Spain fails to get its deficit under control, that 24% unemployment overall and more than 50% youth employment finally stirs widespread social unrest, and let’s assume Spanish banks with their Seanie Fitzcaraldos have underestimated their losses which turn out to be akin to the level of losses in Irish banks but proportional to the size of the Spanish economy of €1tn. In short let’s assume Spain defaults on its loans. Okay it might repay the IMF which assumes the lead position in the queue but if the losses in Spanish banks are akin to ours and couple that with an uncompetitive Spanish economy that is far from “small and open”, and a default may not be such a fairytale – remember the Greek fairytale? So the ESM ends up with a €250bn loss. Who makes that good?

That would be the ESM members and in Ireland’s case, we would have to stump up 1.6% of the loss or €4bn. So Ireland would have to hand over more than any of the painful incremental annual budget adjustments and that money would be gone, and gone forever.

Imagine this no-doubt fairytale scenario (and no, this is not a duplicate): September 2012, Italy’s 10-year borrowing costs rise from 5.8% today to 7.1%, the same as Ireland’s 10-year bond at the start of November 2010 on the eve of our first bailout.Italy decides that this is an unsustainable interest rate, especially when the ESM is supposed to be a cheap source of official funding. So Italy decides to seek a bailout.Italy has a massive mountain of debt to refinance and is also running a small deficit. Italy decides to ask for €400bn. Now where do you think this is coming from?

The advantage of the ESM for Ireland is that we should be able to access funding at the same interest rate that Germany pays for its loans. And when Germany is paying 1% and Ireland must today pay 7%-plus on the traditional bond markets, you can see the attraction of teaming up in a fund which gives us cheap loans. But remember, this is a fund that is not exclusively ours, and indeed it is being designed so that Spain or  Italy– probably not both – can borrow from it. Ireland will have next to no say in the running of the ESM, the ESM and its staff are immune from legal action. Our potential exposure to lending to Spain and Italy would be €10bn-plus, and once we ratify the ESM Treaty that’s it, national parliaments can no longer decide to opt out or refuse a contribution.

So let’s not pretend the ESM is some fairytale creature that gives and gives. We hope to benefit from it or at least have it should we get into difficulties after the end of 2014, but we fund it and it is designed to fund larger EuroZone countries which may default and which may cost this country billions, and we will have very little say in its operation.


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It was interesting that NAMA’s first property for sale with vendor or so-called “staple finance” – that’s where NAMA waives up to 70% of the initial purchase price, converting it into a five year loan at about 4% per annum – was initially sold to a buyer who rejected the staple finance and instead offered cash. But alas the sale of the office block at One Warrington Place to Prudential fell through, and NAMA had to seek another buyer. The new buyer, understood to be an American investor, Northwood is taking advantage of NAMA’s staple finance so perhaps this incentive will be more popular than first thought.

In NAMA’s wide-ranging announcement this morning, conveyed by its chairman Frank Daly at a meeting of certified accountants inGalway, the Agency says

“NAMA expects to lend at least a further €2 billion in the form of vendor finance to acquirers of commercial property.”

This is a staggeringly high figure. Remember that NAMA paid €9.25bn for loans connected to Irish commercial property by reference to values in November 2009 and adding on a so-called “long term economic value” premium. By reference to industry indices, the property underpinning these loans is now worth €6-7bn, so NAMA putting up “at least a further €2bn” in staple finance which equates to €2.9bn if €2bn equates to 70% of the purchase price. That means that nearly half of NAMA’s Irish commercial property will be sold with vendor finance. NAMA charges a 2.5% margin over its cost of funds – which in turn is linked to the 6-month Euribor rate, currently 0.97%. It is theoretically possible that NAMA will offer staple finance outside the Republic of Ireland, but other markets seem to have had better banking recoveries than Ireland.

This announcement by NAMA suggests that the prospects of Irish banks lending for commercial property purchase in the short term are not good. NAMA will also be accused of distorting the true market with its staple finance, but with so much commercial property on its books, and the Irish commercial market worth less than €0.5bn last year, what is NAMA to do?

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“Early indications suggest the 80:20 Deferred Payment Initiative has been well received, with 16 units sold and reservations placed on another 16 of the 115 houses in the pilot phase. The value of these transactions generated in the two weeks since launch is €8.4 million.” NAMA press statement 23rd May, 2012

NAMA has announced this morning what appears to be pretty good news on its so-called “negative equity mortgage” which it launched just a fortnight ago with one tenth of the homes on offer snapped up and another tenth “reserved”. NAMA says that these 32 transactions may generate €8.4m or €262,500-per-home. In a country where only 2,000 mortgages were advanced in the first three months of 2012, that sounds like a stunning success.

The problem is that it seems that few if any of the 32 sales have actually taken advantage of NAMA’s mortgage product and reporting suggests most of the sales have been to cash buyers. NAMA was asked for comment, but has not yet responded.

If confirmed that these sales are in cash, then it is still a stunning success for NAMA but the success would appear to be a result of the marketing and publicity for the homes, rather than the NAMA mortgage product. If that turns out to be the case, then it may become damning for NAMA, because a common criticism of the Agency is that potential buyers can’t see what is on offer.

Last year this blog was overwhelmed with traffic when the first NAMA enforcement list was published. And NAMA’s own website apparently also had a surge in traffic. The Allsop Space auction catalogues are typically viewed by more than 100,000 people online. There is a HUGE interest in Irish property, particularly given the image of low prices in a distressed market.

And yet NAMA would seem to be blocking access to property for sale, both by its receivers and developers. The monthly foreclosure list is replete with errors. And we have now had two instances in Cork where substantial property holdings have been sold without any apparent widespread marketing.

Senator Mark Daly has a Bill tabled in the Oireachtas to force NAMA to list the property it has for sale, that its receivers have for sale and that its developers have for sale, so as to maximise marketing and to make the sale process transparent. Unfortunately the Bill is gathering dust, but the very positive news this morning from NAMA seems to show what can be achieved with publicising the property NAMA has available.

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“(3) The aggregate of the principal of all sums outstanding for purposes other than the provision of consideration for the acquisition of bank assets shall not exceed €5,000,000,000 or such other amount that the Minister specifies by order for the purposes of this subsection.” Section 50(3) of the NAMA Act which sets out the total limit that NAMA can advance to developers for working capita/finishing out projects

Cast your minds back to 2009 when NAMA was conceived and you might just about recall that it has always been the intention for NAMA to provide financing to developers to finish out projects – in fact in the NAMA Act which was passed into law in November 2009, it was envisaged that €5bn would be made available.

And as recently as February 2012, NAMA stated that it had approved €402m advances to developers in the Republic of Ireland for Irish projects, of which €289m has so far been handed over.


This morning in Galway, the NAMA chairman, Frank Daly (pictured above) is announcing that the Agency plans to invest €2bn in projects by 2016 which he claims will create 25,000 construction jobs plus another 10,000 jobs in the wider economy.

So far the details, including workings which show how the 25,000 and 10,000 are derived and the annual phasing of the investment, are sketchy in the press release issued by NAMA.

How credible is the 25,000 jobs claim? Difficult to say as NAMA has not provided detailed workings, but in Northern Ireland recently, the finance minister Sammy Wilson claimed that GBP 580m (€700m) of shovel-ready infrastructure projects would create 2,500 jobs. In Northern England recently it was claimed that €450m investment by NAMA might create 3,000 jobs. With wage levels on this side of the Border being nearly twice those in Northern Ireland, somehow the 25,000 claim looks far-fetched. It is a bold claim and coincidentally is equal to the total direct employment in the IFSC.

The regular audience on here will know that there have been longstanding calls for NAMA to use its cash mountain to invest in the crisis-torn Irish economy rather than redeem its bonds which cost it just over 1% per annum in interest and which don’t have to be redeemed until 2020 – see here and here. So this morning’s announcement is to be welcomed in general, but why is NAMA not using the full €5bn available to it from the NAMA Act – after all, after Minister Noonan temporarily raided the NAMA coffers in March to pay the Anglo Promissory Note, it was most clearly established that NAMA could lend and provide equity for all sorts of projects that would help address the crisis in the Irish economy.

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