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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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