7 March 2010 

EU approval for NAMA means that the Government’s controversial bad bank scheme can now move into operation.  The commission decision that the plan to set up NAMA is in line with rules paves the way for the agency to take charge of €54 billon in property loans from Irish banks.  Even though the scheme has won a general endorsement, individual transactions made by NAMA will have to be notified to Brussels for assessment case by case under its state-aid rules.  It is expected that NAMA, following its endorsement by the EU, will rapidly move into operation.  Finance minister Brian Lenihan has said that no less than €17 billion in assets will be transferred within the next month.  This represents exposure of the 10 largest borrowers to only five banks.  Allied Irish Banks is moving more than €3 billion in the first wave, Bank of Ireland over €2 billion, Irish Nationwide just under €1 billion and EBS building society about €150 million.

Despite the prospect of NAMA moving into operation the position of Irish banks has continued to deteriorate.  AIB recently reported a loss of €2.65 billion for 2009, the bank’s first ever annual loss.  This was caused largely by €3.4 billion in losses on €23 billion in loans moving into NAMA.  Of its total loan book, 29.5 per cent, representing €39bn, are classified as "criticised", or at risk. Two-thirds of those loans are linked to the property and construction sectors.  Of the criticised loans, a total of 13.5 per cent are now fully in default.  The bank has so far taken total losses of €4.2 billion on NAMA-bound loans.  However, given the expected discount on the loans being transferred, those looses could escalate to €8 billion.   The position of the Bank of Ireland has also weakened further with the state having to take a 16% stake through the National Pension Reserve Fund after the European Commission banned the bank from making interest payments to the Government.  BoI bondholders imposed a “coupon stopper” preventing the bank from making any other debt distributions, including the €250m biannual coupon due on the Government’s current €3.5bn preference share investment.  So rather that the public getting a return on their investment in the bank they are forced to further up their stake. 

Doubts over the viability of NAMA have also been raised by continuing revelations over the value of the property on which the loans to be transferred are based.  Much of this has come out in the cases brought against developers by creditors not covered by NAMA.   In a recent case it was revealed that development land in Athlone valued at  €31m at the height of the boom is now worth only €600,000.  In the Commercial Court, Justice Peter Kelly has admitted that his original presumption that land prices had fallen by 70-80% was now put "in a cocked hat".   The fall in land values could be even greater.  If this mark down were applied across the range of loans to be transferred to NAMA it would mean that the state would be paying €51bn for assets worth only €10bn.  While this is the worst-case scenario, and doesn’t take into account the different categories of property based assets, it does give a sense of the potential losses that could be incurred. 

Further weaknesses in the property market have been highlighted in a report from UCD that found there were 345,000 vacant houses and apartments across the country - this represents 17% of all housing stock.  The report estimated that Ireland still has 170,000 houses and apartments it does not need.  Despite this oversupply house prices are still at very high multiples of average incomes.  This distortion is but down to interventions such as NAMA that serve to artificially maintain price levels.  Of course as one of objectives of NAMA is to protect property developers such a consequence is entirely predictable. 

The continued poor state of the property market and the unlikelihood of a revival that would push the value of transferred loans to a level that would allow NAMA to break even makes a loss inevitable.  Given that NAMA was designed as bailout for the banks and property developers this was always going to be the case.  However, it has even failed as a bailout - it has not solved the banking crisis.   The prospect of NAMA going into operation has been the trigger for the banks to declare more losses and appeal for another round of re-capitalisation.  Anglo Irish Bank faces the most pressing capital need as it is moving the largest amount in the first wave – close to €10 billion of the €30-€35 billion it will eventually transfer.  Allied Irish Banks (AIB) has admitted that nearly a third of its total loan book is at risk and that it needs more cash.  Brokers estimate Bank of Ireland will need to raise between €2.2bn and €2.4bn to meet market expectations on capital levels.  The Governor of the Central Bank, Patrick Honohan, has stated that Irish banks will require additional capital after the transfer of loans.  The Government had made it clear that if further re-capitalisation is required it will provide the capital.  This would take to form of equity swaps, with the state increasing its level of ownership in the banks potentially up to the point of full nationalisation. This would mean the state taking on the liabilities and loses of the remaining Irish banks in the same way it has done with Anglo Irish.

Of course all this has to be paid for.  But re-capitalisation, unlike the NAMA scheme, cannot be kept of the balance sheet.  It draws from the same general public spending pot as public services.  This means that every euro for the banks is a euro less for schools and hospitals and the wages of public sector workers.  Ministers may talk of cuts and efficiencies but more than this it is a transfer of wealth from one class of people to another.   Fine Gael leader Enda Kenny has warned funding for Anglo Irish Bank would lead to “a revolution in the streets’’.  This was no doubt rhetorical, but if we want to stop this assault upon the working class we must make his prediction come true.