|Q: Will NAMA Work?
NAMA will take loans (assets) from the banks worth an estimated €47 billion and in exchange will give the banks government bonds worth 54 billion euro.
Yes! After giving the bonds to the banks NAMA will also have to pay interest to the banks on these bonds.
NAMA will pay at an interest rate of ECB + 0.5. In the first year this will be an interest rate of 1.5%. However the ECB rate will rise over the next few years so the interest bill will also rise dramatically
In the first year this is likely to be in the order of 800 million. In subsequent years it is likely to rise to 2.3 Billion euro or more as the interest rate rises.
60% of the loans being taken by NAMA are non-performing – these will pay no interest at all. The remaining 40% are currently paying interest. Brian Lenihan claims that the 40% of loans that are paying interest will cover the 800 million above.
It is likely to decrease. Some of the currently performing loans are likely to go into default as EU interest rates rise. Much of the commercial lending that comprises 30% of the NAMA loans is on the edge of going into default. A recent report from Retail Excellence stated that trading conditions in all but two of 58 shopping centres were suffering (the Dundrum Centre being one of the two) and that very large rent reductions were occurring.
The taxpayer. It is likely that the taxpayer will be funding NAMA to the tune of billions every year within a couple of years.
NAMA may slow the fall in property prices in the near future by preventing developers from being wound up as quickly as they would otherwise be. However in the medium term property prices will still fall simply because so much money has to be taken out of the economy. In the long term NAMA will result in lower property prices than otherwise because property prices depend on the economy and NAMA will be deleterious to the economy because it puts a large amount of resources into unproductive hands.
NAMA is buying loans (called assets). The properties associated with NAMA are the collateral underlying the loans.
NAMA will pay 7 billion Euro above the current market value (CMV) of the properties underlying the loans. The government refer to this as paying long term economic value (LTEV).
The banks are currently close to bankruptcy and need the extra seven billion in order to continue their operations.
Yes the government could give the banks the extra seven billion in exchange for a major shareholding (recapitalisation). The state would then benefit from any upturn in the value of the banks.
Current Market Value
There is no known instance of another country paying LTEV. Most countries have recapitalised their banks.
Joseph Stiglitz, Nobel Prize winning economist has said that paying more that CMV is “Criminal”. (Primetime Tuesday 6th Oct).
Their motives are hard to understand.
There is a dubious argument made by John Gormley that recapitalisation would necessitate higher interest charges as we would need to issue ordinary government bonds which pay a higher interest charge than NAMA bonds. This argument seems largely fallacious and even if true the interest difference would be less than 100 Million Euro which is very small in comparison to value of the bank shareholding that the taxpayer would own through recapitalisation.
It seems much more likely that the real reason is to keep the banks in private hands at all costs and to protect Fianna Fail’s “Golden Circle” of shareholders and bondholders.
Yes over a ten year period it will have to pay the money back.
Some of the money will come form the repayments of the capital on the minority of performing loans. For the majority of non-performing loans the underlying properties will have to be sold and the sale price used to repay the bonds.
It will only be enough if the price of property rises by 10% from its current level over the next 10 years.
Q: Are Irish property prices likely to rise by 10% over the next 10 yearsAbsolutely not. Irish property is still way overvalued according to long term trends, according to yields and salary multiples.
It will have to pay the banks back using taxpayers money.