JM Thorn 

24 September 2009 

The opening of the Dail debate on the legislation that will create NAMA has provided us with some figures on what the bailout of Irish banks is likely to cost.  In the draft bill, which was published earlier in the year, we got a sight of the structures of NAMA and how it would operate.  However, the critical element, how much the Government was going to pay to take the toxic loans off the banks, was missing.  We have now got some detail on that.

The finance minister announced that NAMA would take €77 billion worth of loans of the banks, with the state paying around €54 billion for these - a discount of around thirty percent.  His department estimates that the current value of these properties, if they were to be put on the market, would be in the region of €47 billion - a write-down of 47 per cent.   It estimates that, in the long term- in other words, in about seven to ten years - it is reasonable to expect that they might be worth €54 billion, the so-called long-term economic value of the assets.  On these figures there is only a €7 billion gap between the current value of the assets and the amount that has been paid for them.  Given the speculation that had appeared in the media prior to the debate, of the Government taking on €90 billion worth of loans and the gap between what they were worth and what was paid being up to €30 billion, these figures don’t seem as bad. 

However, when we examine the figures in closer detail, we find that the costs and potential risks of NAMA have not been diminished.  What the Government has done is to conceal them by making a number of unfounded assumptions and engaging in a financial sleight of hand.  Firstly, there is the estimate of the current market value of the assets (mostly property) related to the loans that are to be taken over by NAMA.  The finance minister has estimated these assets have fallen in value by 47 per cent, leaving them with a market value today of €47 billion.  But how accurate is that estimate? 

The NAMA loans are divided up into three categories - landbank, development and associated. Landbank loans account for 36 per cent of the total, development loans account for 28 per cent and associated loans (mainly commercial properties, such as office blocks, retail buildings, hotels etc) account for 36 per cent.  Given that the total value of these projects was €88.3 billion (the value of the property on which the loans were secured), then the original value of the landbank was €31.7 billion, development projects were valued at €24.7 billion and the others were valued at €31.7 billion.  But what are they worth now? 

According to Savills summer 2009 property review, landbank values have fallen by between 30 per cent and 90 per cent from their peak.   Danske Bank has said that some sites in Ireland had fallen in value by 80 per cent. Home-builder McInerney Holdings recently wrote down the value of its land bank by 52 per cent, while Davy Stockbrokers recently wrote down the value of its client’s investment in the Irish Glass Bottle site by 60 per cent, and the former Cahill Printers site in East Wall in Dublin by 90 per cent.  Based on these deals landbank prices have fallen in value by 60 per cent since their peak – and that would be a conservative estimate.  This means that the original land in the NAMA portfolio may have fallen from €31.7 billion to €12.6 billion.   The value of development projects has fallen by at a much greater amount.  During the Carroll case, the legal team acting his Zoe group of companies, admitted that a sale of the group’s assets would raise only €300 million of the €1.2 it owed.  This represents a 75 per cent fall in the value of Carroll’s assets.  Given the size of this property empire this would be fairly representative of the sector as a whole.  The third element of the NAMA book is associated loans.  These are loans made to big developers, which are secured on commercial properties such as shopping centres, office blocks and hotels.  They are buildings which are finished and are generating a revenue stream, and are probably the best loans on the best properties on the NAMA.  But even they have seen their value fall, with commercial property down by around 50 per cent from its peak.

Taken together, and based on a conservative estimate of a 60 per cent fall from peak for the land and development projects and a 47 per cent fall for the others, this leaves the current market value of the NAMA assets at €39 billion, not the €47 billion claimed by the Government.  On these estimates the gap between what will be paid for the assets and what they are worth increases to €15 billion. 

The second concealed cost of NAMA lies in the bonds that the Government will be using to purchase the loans from the banks.  The Government will exchange bonds for the loans and the banks can then cash these bonds with the European Central Bank.  However, this is not free money - the Irish Government has to pay interest on these bonds.  NAMA bonds will have an interest rate set at a half percent above the ECB’s main refinancing rate.  While the ECB rate is now one percent it is expected that it will rise over the next few years.  The amount of interest paid on NAMA bonds could increase significantly as those rates rise. 

The third concealed cost of NAMA will be a further round of capitalisation of Irish banks.  It may have thrown people a little than the Government left some of the toxic loans on the books of the banks rather than taking the full €90 billion worth into NAMA.  But this was really a sleight of hand designed to bring down the headline total.  In the case of the nationalised Anglo-Irish the public has already taken on its full loan book.  NAMA moving into operation will be the trigger for Irish banks to declare looses on the bad loans left on their books and appeal for new capital.  AIB already said that it needs €2 billion in new capital.  It is estimated that Anglo-Irish will need additional €4 billion in fresh state capital to continue to operate.  This could rise to €6 billion or more due to further write-downs on loans not transferred to NAMA.  Injecting more funds into the banks will also place further strains on the public finances as the Government would need to borrow the money with little prospect of ever getting a return on it.

If you total these costs – the inflated estimate of asset values; the interest paid on bonds; and the further capitalisation - they are not far off the earlier estimates of what NAMA would cost, with the potential liabilities getting up towards €30 billion.  Whatever way it is calculated or presented the one certainty is that NAMA is a bailout for the banks.  When opening the debate on the legislation Brian Cowen had the gall to deny that this was the case.  However, the reaction of the stock market told a different story, with the prices of Irish bank shares shooting upwards.  Reports of Irish property developers organising a “NAMA celebration” in Spain was another indication who the beneficiaries are.  The one gesture toward equity in the NAMA legislation, and for which the Green Party claimed credit, are it provisions on risk sharing.  This involves holding back €3 billion of the €54 billion paid for the toxic loans if NAMA doesn’t break even.  Yet this grossly one sided nature of this, €51 billion for the banks opposed to €3 billion for the public, only serves to highlight its inequity. 

The NAMA process is the perfect representation of the approach of the Irish ruling class to the economic crisis – the capitalist class (who bear responsibility for bringing it about) are bailed out while workers are made to bear the cost.  This is what is sharing the pain means in reality – it all coming down on the working class. In a capitalist society such as Ireland it cannot be any other way - this why any concession to such arguments is so dangerous.  If workers are to successfully resist the assault unleashed by the Government and employers they must completely reject the bank bailout and any idea about sharing the pain.