NAMA: a necessary evil

With their approval rating at an all-time low and pressure from the Opposition to call an early election, the Government could really do with some good press. It is a wonder then that Fianna Fáil is proposing a plan that has little support from the general public.

The setting up of the National Asset Management Agency (NAMA) – touted as a panacea for Ireland’s banking system – is being pursued as an alternative to widespread nationalisation. On paper, the plan looks like an attractive idea. NAMA will act as a “bad bank”, buying up toxic loans and assets, in order to clear Irish banks’ balance sheets and inject more liquidity into the economy. The priority is to get the banks lending again while avoiding messy nationalisations which could put the taxpayer’s money at even more risk.

 A recent report published by Bloxham stockbrokers argues that NAMA can fulfil these requirements. As it stands, the total loan book held by the banks operating in Ireland comes to €534bn, with the largest portion (44%) being taken up by mortgages.  On top of this there is a significant imbalance between value of the loans held by the banks and the size of the banks’ deposits. This means that there is a significant liquidity shortage in the banking sector.  There are two ways to address this worrying imbalance. Firstly, the institutions can attempt to reduce the size of their loans. Reports suggest that shrinkage of €190 billion from their lending books over the next few years would be necessary. This is what NAMA is setting out to accomplish. Otherwise, banks would need massive injections of capital to increase the size of their deposits. This option leads to nationalisation. These are both viable alternatives, so why has the government chosen to target loans rather than deposits?

Although recent history offers us many examples of nationalisations — Germany, Sweden and Finland have all turned to it in the past to deal with their respective crises — comparison can only go so far. While it is prudent to analyse and take into account the actions of other governments and financial institutions, it is important to focus on the unique aspects of the current situation. A measure which was successful in one economy at one point in time may prove ineffective or counter-productive elsewhere because of different fundamental issues.

For example, when a similar banking crisis took place in Sweden in the early 1990s, the effect on unemployment was not as dramatic as the one that has been produced in Ireland. A recent poll of Irish economists by Reuters shows that unemployment is expected to rise to 13.9% at the end of the last quarter. Differences exist with regard to public debt also. Finland’s public debt rose from 12% to 60% of GDP over five years as its government struggled to get to grips with the crisis. Irish public debt is currently thought to stand at 60% of GDP, and the National Treasury Management Agency (NTMA) estimates that it could rise as high as 73% in 2010 (it is important to point out that the money used to finance NAMA will classified as “off balance sheet” and is not reflected in this figure.) Finally, it is crucial to note that the size of our loan book exceeds that of either country during their respective crises. Because of these dissimilarities between Ireland and comparable cases, an alternative solution had to be sought.  

The unveiling of the NAMA legislation on September 16th represents a turning point for the sector: Bank of Ireland shares jumped by 17% when the markets opened the following morning, while AIB shares rose by 29% in just 20 minutes. This is a clear sign that investors see this legislation as a key tool in the Government’s responding to the crisis. But what about the taxpayer?  One of the key concerns raised by the opposition and members of the public is that NAMA will overpay on the value of these loans.

Brian Lenihan, the Minister for Finance, has announced that the loans bought by the agency will be discounted at an average rate of 30% from their peak value. This valuation has already been built into the predicted cost of acquisition with the potential for future levies to be placed on the banking sector. Mr. Lenihan hit back at critics who argue that the recession could prove to be W-shaped, by saying that there was clear evidence that Ireland had reached the bottom of the slump.

Proponents of the scheme also point to studies which suggest that the cost of nationalisation would be a greater burden to the taxpayer than NAMA will prove to be.  Nationalisation also brings with it the risk of deterring private investors.  No new taxes will be introduced to pay for these  discounted
assets. All funding comes from the sale of State Bonds which have a further guarantee from Europe. The state will pay €54bn for assets with a book value of €77bn.

Despite the risks associated with the scheme, the benefits are clear. But public support for NAMA has been tepid. There is the perception that it exists simply to help bankers keep their jobs and developers to keep their millions. But the real problem is that NAMA is being put forward by an unpopular Government.  A poll conducted in early September showed that public support for the “bad bank” hovered around 26% while the Government was enjoying an approval rating of just 17%.

The opposition parties have been very vocal in the expression of their misgivings about the proposal, with Labour supporters even going so far as to picket the Dáil while the NAMA debate was taking place. The concerns of the Opposition are valid, but sadly the discussion has descended into exactly the kind of political point-scoring that this country can ill afford. To an extent, the Opposition are right: this is a huge financial under-taking, and only the scrutiny of our elected officials will ensure that there are no major hiccups. But all sides need to accept that NAMA is now a reality and should work together in order to ensure its success. With such a costly scheme on the table, we cannot afford them not to.