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NAMA revised again as budget deficit
is forecast to double
JM Thorn
31 July 2010
A
raft of economic data released over recent weeks has highlighted once again
the escalating costs of the financial bailout and the continuing parlous
state of the Irish economy.
Firstly,
there was yet another revision of NAMA, with the publication of an updated
business plan. While the previous plan (published last October) had forecast
a profit, this one revised expectations downwards and conceded for the
first time that the scheme could make a loss.In
the new plan the forecasts for the €81
billion in loans to be bought by NAMA have been have been sharply downgraded.The
explanation given for this turnaround is that the Agency had based its
first plan on inaccurate information provided the banks, while the second
plans was “grounded in reality” and based on its own independent analysis
of the loans.That the banks should
provide inaccurate information and that it should be accepted so readily
by the Government shows the lack of integrity and openness in these transactions.Of
course, given that it is a bailout it can’t really be anything other than
arbitrary and corrupt.
Earlier
this year when the transfer process got underway NAMA bought the first
€15.3 billion in loans linked to the 10 biggest property developers
at a 50 per cent discount.Its updated
projections are based on the same discount being applied to the remaining
loans.This is a long way from the 30
per cent average discount first estimated by the Government and the Agency
last autumn.NAMA has also disclosed
that only 25 per cent of the loans are now performing or generating income, compared
with an estimate of 40 per cent in the draft plan.On
the basis of these changes the Agency has had to downgrade its profit projections.
Where NAMA expected a profit of €4.8 billion last October, it is now
forecasting a profit of €1 billion, which may turn to a loss of €800
million under a “worst-case scenario”.
What
these revisions reveal is that the values of the loans and the property
on which they are based have been exaggerated.The
purpose of this has been to maximise the bailout to the banks while downplaying
the cost to the public.This has been
a consistent feature of NAMA since its inception, and is continuing today.While
the Agency has finally conceded the possibility of a loss, the size that
loss is a gross underestimate.The
new business plan outlines a worst case scenario. But
the Irish property market has already reached and surpassed that scenario.The
projected €800m loss is based on a 10 per cent fall in property prices.Yet
two thirds of NAMA’s portfolio is already in that position, and these are
loans that have been valued on their worth last November. Since
then property prices have fallen by a further ten per cent, with the value
of development land dropping even further than that. For
NAMA to break even property prices would have to rise by 20 per cent over
the coming decade.With the property
market in a poor state and continuing to deteriorate the real worst case
scenario is much worse than that being conceded by the Agency and could
potentially see losses in the tens of billions.
The
Government has trumpeted the provision to impose a levy on the banks as
a safeguard against a loss by NAMA.However,
the imposition of a levy has never been certain.The
legislation only stated that the banks “may” be subjected to a levy.Moreover,
imposing a cost on the banks would run contrary to the objective of the
bailout, which is to relieve banks of their liabilities and put them a
position to be returned
fully to private ownership. The government will be looking to unwind its
ownership position in the banks in the coming years. If there is a threat
of a potentially large levy hanging over the banks that could potentially
deter private investors.The more
the losses on NAMA start mounting up the further the prospects of a levy
will recede.Also, by the time the
final costs of NAMA are available the banks will most likely have returned
to private ownership.A new owner
could claim that the costs of the financial bailout were a “legacy” issue
which it could not be held responsible for.
While
it has obvious for some time that NAMA is a vehicle for the bailout of
the banks, what is now becoming clearer is the degree to which has served
to protect property developers.Their
assets, which would have been the subject of claims by creditors, are being
shielded by the Agency, while many of them continue to receive special
treatment.NAMA has taken up the role
that had previously played by Irish banks. This position was highlighted
in the Agency’s revised business plan in which it stated that it would
“work with certain debtors where it
takes the view that this is the optimal commercial strategy in the circumstances.”At
its launch, the Agency’s chairman Frank Daly highlighted how relaxed financial
institutions had been towards the debts of developers.Borrowers
had free cashflow which
the banks had not taken charge of to repay interest bills when they could
have. Some of the 10 biggest borrowers had not even been asked about repayment.These
revelations were made to contrast with the Agency’s supposedly more robust
approach to developer debts.However,
the evidence so far suggests that not much has changed, and that banks
and developers continue to be treated with kid gloves.For
example, financial institutions have taken advantage of an uplift in the
UK property market to encourage borrowers to refinance or
repay loans by selling the underlying properties in advance of the transfer
of the loans to NAMA.Before
the loan transfers began last March, a large number of loans at Bank of
Ireland earmarked for transfer were repaid, sold to third parties or refinanced
to other lenders, many of which were investment property loans generating
interest income.The
bank and developers are so brazen they are demanding that they be bailed
out and allowed to keep all their assets too.The
wholly state-owned Anglo Irish Bank has challenged the NAMA on its plans
to buy the loans of developer Paddy McKillen and taken issue with “factual
errors” made by the agency in a letter to his solicitors.Anglo
has objected to the transfer of €800 million in loans owing by McKillen
and his companies, arguing that his loans were not on a list of top 100
land and development loans submitted to the agency last year.The
bank has appealed successfully against the transfer of loans belonging
to other borrowers.
The
operation of NAMA and its potential cost to the Irish people is shocking,
but it is just one element of the financial bailout.Indeed,
it is not even the most costly element.This
is likely to be the next round of recapitalisation which will follow the
transfer of loans to NAMA and the announcement of major losses by Irish
banks.We got an indicator of this
in the ESRI’s
latest Quarterly Commentary which forecast that the public deficit for
2010 would be 19.75 per cent of GDP.This
is made up of the ‘underlying’ deficit of 11.5 percent of GDP plus the
capital transfer into Anglo Irish Bank of 8.25 percent of GDP. The recapitalisation
of Anglo Irish therefore almost doubles the annual deficit.However,
the costs of recapitalisation will be actually much greater than this.The
money going into Anglo Irish is only factored into the deficit because
it is fully in state ownership.The
costs of recapitalising the other financial institutions, which are only
partly owned by the state, do not show up in the deficit – they are classed
as investments rather than debts. However, this is really a false distinction
as the capital that goes into to all the banks will be borrowed from the
bond markets and adds to the indebtedness of the state.While
the government claims that its priority is to reduce the deficit and state
debt the consequence of its financial bailout is the direct opposite.The
ESRI forecasts that the deficit will widen to €31.3bn this year, or
19.75 per cent of GDP. That's up from €13.2bn as recently as 2008,
and a small surplus in 2007.Overall
debt continues to rise as
the deficit remains stubbornly high, interest payments mount and the GDP
denominator declines, from 25.1 per cent in 2007 to a forecast of 93.5
per cent in 2011.
As
the bond markets are well aware of the rising level of state indebtedness
it was not a surprise that Moody’s rating agency downgraded
Irish government debt.Its
general justification for the downgrade pointed to a number of factors
including liabilities arising from the bank
bailout, weak growth prospects and a substantial increase in the debt/GDP
ratio.However, Dietmar
Hornung, Moody's lead analyst for Ireland, was a bit more categorical,
stating that the downgrade was “primarily driven by the Irish government’s
gradual but significant loss of financial strength, as reflected by its
deteriorating debt affordability."The
financial situation for the Irish state is deteriorating because as
existing debt government debt matures it has to be replaced by new debt
issuance, and, now at higher interest rates. At the same time, borrowing
is required to meet the widening of the deficit.The
combination of extremely high deficits and economic contraction is increasing
the debt burden and pushing the Irish state towards bankruptcy.
The increase in the market interest rates on Irish government debt, which
is now 5.5 per cent, is an indicator of this. By
comparison the market interest rate on German
government debt is 2.59 percent, while Spain's debt yields are 4.62 per
cent. Such figures donot support the idea
widely promoted that the economy is being rewarded for its austerity drive.
In
economic terms the strategy for recovery being pursued by the Irish ruling
class has to be judged a complete failure.It
has produced the very opposite of its stated objectives.The
economy has not returned to growth, unemployment is rising, the deficit
is widening and the overall burden of debt has increased.The
Irish state is heading towards bankruptcy. But we must remember that capitalism
is not just and economic system but a system of class rule.When
we examine Ireland in these terms we see that ruling class strategy has
had some measure of success, with the burden of the crisis being borne
overwhelmingly by the working class.
Also
when we examine the policies put forward by the opposition parties in the
Dail or the trade union leadership they differ little from what is being
pursued already.Even the academic
economists, who have been the most vocal critics of the Government, end
up sharing its position. The authors of the ESRI commentaries pull apart
what the Government is doing but still end up agreeing that the only road
to recovery is austerity and faith in the markets.They
even go further than the Government by calling for planned cuts to be deepened
and accelerated. What they all agree on is that the working class must
suffer and pay the cost of a crisis that has been created by others.If
workers are to resist this they need to organise around independent political
position which makes no concession to the idea that Irish people are all
in this together or there should be a sharing of the pain. |
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