JM Thorn

18 October 2009

Further details on how NAMA will operate came last week when the finance minister unveiled its business plan.   Much of the media attention focused on the minister’s claim that the bad bank scheme would generate a profit for the state.  When the price the Government would pay for the banks loans was revealed last month we were told that a recovery in asset prices of 10 per cent over the ten-year lifetime of NAMA would avoid a loss.   It now says that by 2020 when NAMA is expected to be wound up, the agency will have returned a profit of €5.48 billion to the taxpayer. After inflation this will amount to €4.8 billion.

To arrive at this figure a number of assumptions are made.  Firstly, that the valuation of the loans are accurate; secondly, that there will be a recovery in the value of the property that underpins most of these loans; and thirdly, that the default rate on loans will only be 20 per cent.  However, all these assumptions are without foundation.   The valuation put on the loans by the Government bears no relation to their current value or even their likely future value.   The 30 per cent discount on the loans announced in September was all about leaving the banks with enough capital to prevent them falling into insolvency.  Current market transactions, along with the information that came out in the Carroll case, demonstrate that the value of these assets has fallen by up to sixty per cent, more than twice the Government’s estimate.  The admission that officials have not even got round to examining the individual loan files, and are relying on data supplied by the banks, emphasises both the arbitrary nature of this process and that it is being driven by the banks themselves. 

The assumption on the default rate is also arbitrary.  Officials expect that of the €77 billion loans owed to NAMA  €62 billion will be repaid and €15 billion will not, that’s 20 per cent of the loans defaulting, with the other 80 per cent eventually paying off in full.  But these figures are not based on current conditions in Ireland, but on a comparison with the performance of Barclays Bank during the property slump in the UK in the early 1990’s.  It is assumed that because the default rate on Barclays’ loan book at that time was less than 10 per cent, the default rate on NAMA’s assets will only be 20 per cent.  Again this bears no relation to current conditions in Ireland, which are much more severe that those in the UK twenty years ago.  It is likely that far more than 20 per cent of these loans will fail to be paid back in full.  The bogus nature of NAMA’s business plan was summed up well by the economist Morgan Kelly: "When you have every assumption like that, you no longer have a forecast, you have a fantasy."  Of course the Government has to spin a fantasy for NAMA, to do otherwise would be to admit what it really is – a bailout for the bankers and property developers. 

Although most of the attention has focused on the banks, the degree to which NAMA is also a bailout for the property developers has become clearer with the business plan.  Despite the talk of rigouroulsy pursuing debtors (most of who are developers) the timetable for debt recovery is very lax.  Only  €1 billion of  €77 billion owed will be recovered in both 2010 and 2011, with €2.5 billion recovered in 2012.  This jumps to €7.5 billion in 2013.   There are no plans to recover this money soon; with developers effectively being told they don’t have to pay anything back until 2013.  So NAMA aids developers by protecting them from their creditors and artificially maintaining the value of their properties.  The business plan also holds out the prospect of further loans being extended to developers to fund the completion of some unfinished developments.  So not only is the value of their properties being preserved it is being enhanced.  In the draft NAMA Bill the amount it could borrow for such purposes was set at €5 billion, although there are indications that this could be raised.  There are also indications that once banks offload most of their debts onto NAMA there will be a further round of recapitalisation of up to €7 billion. 

As the NAMA process unfolds alongside the onslaught on public services and workers living standards its essential nature – a transfer of wealth from one class of people to another – becomes ever more apparent.  This is what sharing the pain means in capitalist society – everything coming down upon workers.