The Minister for Finance appeared on Morning Ireland today. A strict interpretation of his comments would suggest that NAMA is going to apply a very large haircut.
For example, he started his interview with the following comments:
We start with the market value and that’s clear in the legislation. The market value is fundamental and, as I pointed out yesterday, there are some assets which will not go beyond the market value. For example, demographic factors and population trends may mean that some of the land which was acquired for development will never have any additional value and therefore must be pegged at current market value. However, some of the land is at present not sellable in what is a very illiquid market, and some allowance can be made, and it’s a limited allowance, but some allowance can be made for that in the determination of what’s a fair price. But we start with the market principle. I think that’s fundamental in this valuation procedure. Some allowance can be made for longer-term economic value but it can’t be used … to benefit shareholders of banks. It has to be on the basis of the fundamental fairness of the price.
One can quibble a bit with parts of this statement—for instance, any deal in which the taxpayer offers to pay more for a bank’s assets than anyone else will is, by definition, a deal that will benefit the shareholders of the bank relative to the scenario in which the government doesn’t set up a NAMA. However, in general, the sentiments are more hawkish about the discount to be applied than one might have expected.
But, of course, it’s not so simple. Given what we know about house prices, about prices for development land, about the financial situation of property development groups such as Zoe and, most importantly, about the equity capital positions of the banks, a tough valuation process would point to the banks being insolvent and thus being nationalised. However, it is clear that the government does not intend this as an outcome—for instance, in the Q&A notes given out to the press yesterday, one of the first questions answered was an explanation of why the government does not want to nationalise any banks.
And if the Minister’s comments were being taken seriously as an indication of a large discount to be applied, then why are the bank share prices up this morning? As of 10.30, AIB was up 7% and BOI up 9%. This suggests that equity investors haven’t interpreted the Minister’s comments as being so tough.
One other thought comes to mind on this. While I have been focusing on the long-term economic value element of the valuation process, the Minister’s comments that there will be limited room for such adjustments may push back the focus to the figures being put on market value. We know that the government has appointed the good people of Jones Lang Lasalle to advise it on property values. If these people are anywhere near as optimistic as previous government advisers such as PWC, then perhaps there won’t be much need to engage in so much long-term value chicanery to arrive at a high price. Conspiracy theorising perhaps but one to watch out for.