Month: August 2009

Minister Lenihan has returned from his holidays to talk about NAMA on RTE’s This Week. I’m not sure much new was revealed from this interview. On the key question of what will happen with the major banks, the Minister argues that only “some allowance” will be incorporated for long-term economic value while at the same time he says “we don’t anticipate nationalising any other institutions in their entirety”.

To see what this means in practice, consider AIB. This bank has property-related loans of €48 billion, half of this being development loans. It is widely reported that €30 billion of these loans will be transferred to NAMA. The bank has private core tier 1 capital of about €8 billion. So the minister is saying that he is not anticipating a discount for AIB as high as 27 percent (because 27 percent of €30 billion is €8 billion.) 

Given what we know about the current financial situation of Irish property developers, the haircuts envisaged by the Minister appear to rely on a very substantial recovery in property values. And yet the Minister also rules out purchasing assets at multiples of their current market value, so I don’t see how the various comments here hang together.

It would be interesting to know on what basis the Minister’s anticipations about NAMA transfer values have been formulated. And since the people doing the mysterious long-term economic value calculations all work for the Minister, it is reasonable to ask how likely it is that these people can back out the right answer as to what the average haircut needs to be to fit with the Minister’s anticipated outcome.

Of course, this could all be a bait and switch, and the main banks could end up being nationalised. However, the spin suggests otherwise. The Minister’s latest comments contained a series of misleading remarks about nationalisation.

For instance, Minister Lenihan blames the cost to the taxpayer of re-capitalising Anglo on the fact that the bank was nationalised, rather than on his decision to guarantee almost all of Anglo’s liabilities last September. In relation to AIB or BOI, the implication is that the cost of sorting them out would be higher if we don’t overpay for the assets to keep them in private ownership. There are arguments worth airing against nationalisation but this just isn’t one of them. As long as the guarantee is kept in place, these banks need to be recapitalised, most likely by the state. Doing so by overpaying for assets rather than by getting an equity share really doesn’t save money.

An unnamed foreign country that nationalised its banks, leading to disaster, was mentioned by the Minister. I’m guessing the country the Minister has in mind is Iceland. Minister Lenihan may think a decision to nationalise the banks was the cause of Iceland’s problems. I’d wonder though.