NAMA legislation creates financial monster
4 August 2009
The scale of the proposed rescue for Ireland’s privately owned banks has become a little clearer with the publication of the draft legislation that will establish the National Asset Management Agency (NAMA). The creation of this “bad bank” will see the Government purchasing loans with a face value of up to €90bn from the banks. The new agency will take control of the loans and the properties which have been pledged as security against the loans, holding them until the market improves when they can be sold and money recuperated. It is claimed that this process will restore the liquidity of the banks, enabling them to start lending again and thereby hasten the pace of economic recovery. The scale of this is huge (NAMA will be one of the biggest property companies in the world), and the risks for taxpayers considerable. If it goes wrong the state could be bankrupted.
With the publication of legislation we know the mechanisms of the bank rescue, the probable structure of NAMA and how it will operate. Government bonds will be used to acquire property loans from the banks at a discounted rate and the banks can then cash the bonds with the European Central Bank. However, there is one critical element that remains unknown – that is how much the Government will pay the banks for the loans. The Government has indicated that it will not pay the value at which the loans were made (€90bn), but neither will it pay the current market value, which after the collapse of the property market, stands at around €40bn. Therefore it is a range of around €30bn in which the valuation of the loans will be placed. The higher the valuation is placed within this range the greater the benefit to the banks and the greater the risk taken on by the public.
The Government has already conceded that there will be a loss. A recent memorandum from the Department of Finance admitted that the long term value of the assets to be transferred from the banks would be “significantly less than the outstanding loan.” However, given that the whole NAMA process (along with the measures which have already been taken such as recapitalisation and deposit guarantees) is a bailout it couldn’t really be any other way. The question is not whether there will be a loss, but how great that loss will be. Bank analysts and economists estimate that the 'haircut' that the banks will have to take - the discount that will be applied to their loan portfolios - will be less than 25 per cent of the loans' values. It is expected that the Government will pay about €60bn or €70bn for them – handing a gift of €30bn of public money to the bankers. The corollary of this is that the public could incur a loss of up to the same amount.
Whatever scenario pans out for NAMA, even if it is judged a success in the terms set by the Government and the banks, the public will be the losers. If it goes wrong and property prices fail to recover or fall even further the implications for the public finances could be catastrophic. It could potentially double the national debt at a stroke and plunge the country into bankruptcy. If it goes right then all the gain will gain will be for the banks. The rising price of bank shares since NAMA was conceived as a rescue package reflects the markets' view that shareholders will be the winners in this process.
The current legal case involving property developer Liam Carroll and his Zoe Group illustrates how the NAMA process potentially could be derailed. Carroll and his companies owe their bankers close to €2.8 billion, but a move by the Dutch bank AAC to appoint a receiver risks forcing a sale of his assets - depressing the value of his properties and the wider property market even further. The Irish owned banks for their part would have preferred to loan Carroll more just to keep his companies alive long enough to be dumped on NAMA.
The NAMA process is all about bailing out the banks and protecting property developers. The former receive huge transfers of wealth from the public while the latter are protected from their creditors and value of their assets artificially maintained. Far from solving the financial crisis NAMA could be laying the basis for a repetition. All the parties involved, the banks, the developers and the Government have an interest in engineering another property bubble. In many ways this is irrational, as it will just precipitate an even deeper crisis in the future. This point has been made by some right wing economists who have advocated the temporary nationalism of the banks as the best means to deal with the financial crisis. From their perspective such proposals are rational, but they do not reflect the reality of capitalism, particularly in Ireland where finance and construction play such a big role in the economy and where the political class is so beholden to these interests. .
However it operates and whatever the outcome of the bank rescue the one thing that is sure is that the working class will be made to pay its price. Indeed, they are already paying the price with the ongoing assault on jobs, wages and public services. The bank rescue can only intensity such attacks as it consumes more and more public resources. Fortunately, many workers are already hostile to idea of NAMA - seeing for the bailout of the banks and developers that it is. They already have a sense of outrage over the people most responsible for the economic crisis being rewarded while those least responsible are penalised. Such sentiments are welcome put they are not enough in themselves to mount a challenge to what is going on. For this to happen the working class must establish its political and organisational independence. It must break with social partnership and the disastrous idea that we all have to share the pain. If this is accepted, as it has by the current trade union leadership, any opposition is severely limited. This is reflected in the muted response of trade union leaders to the NAMA legislation.
One of the ways workers can break with
the consensus is to oppose the Lisbon Treaty. Although it is not
often obvious, the fact is that the EU is one of the forces behind many
of the attacks we are facing. It the EU that is demanding Ireland
dramatically reduces public spending to conform to the criteria for euro
membership. It is the EU, through the ECB, that is facilitating the
bank rescue and the establishment of NAMA. With the second referendum
coming up in October socialist activists will have the opportunity to make
these specific arguments and also more broadly how to how we build an opposition
on both a national and international level.