Month: September 2009

NAMA Bond Yield Formula Finally Revealed

Finally, and only after questioning prompted by Brian Lucey’s earlier appearance on Morning Ireland, the Minister for Finance decided it was appropriate to let us know exactly what type of bond he was issuing with €51.3 billion of our money. The regular NAMA bonds will be issued with a six-month rollover period with an interest rate set at a half percent above the ECB’s main refinancing rate. This ECB rate is now one percent but there is general agreement that it will rise over the next few years (click here for historical values).

It should be clear now that there is nothing especially good for the Irish taxpayer about the current low yield on these bonds. At a time of low short-interest rates, it can always appear as though one is saving money by borrowing short and rolling over this short-term debt. However, because bond market participants aren’t stupid, long-term rates are determined with reference to this short-term rollover strategy, so there is no “free lunch” from issuing short-dated rather than longer-dated bonds. (Here are my own teaching notes on this issue.)

Those who think that the NAMA bonds are an especially good deal for the taxpayer might also note that the government is currently able to borrow at a six month duration at a rate of 0.5 percent—the yield on the latest six-month NTMA Treasury Bill auction. The extra amount being paid on the NAMA bonds can be justified as reflecting the higher sovereign default risk associated with longer dated debt.

I would note also that, given the relatively unremarkable nature of these bonds, any claims that their current low rate reflects some sort of special deal with the ECB—claims I never understood—need to be retired from circulation.

In relation to NAMA “washing its face” (it was washing its hands on Morning Ireland earlier—perhaps because of swine flu) there is no reason to expect the coming ECB interest rate hikes to generate corresponding increases in income from the 40% of NAMA assets that are generating income, so claims NAMA will always break even on an income basis appear to have little basis in reality.

Of course, we still don’t know anything yet about the maturity of these bonds. Or about the yield on the €2.7 billion in subordinated bonds. Or about the exact conditions under which the subordinated bonds will fail to pay off—though statements that they will pay off as long as property prices bounce back by 15% suggests that, as I had feared, the definition of “NAMA making a profit” will exclude interest costs.

But hey, Pat McCardle still reckons it’s all a secret EU conspiracy, so who am I to disagree? Perhaps Pat might enlighten us as to what changes the ECB have made to their current operational procedures to accomodate NAMA. Perhaps not.

The New Guarantee Scheme

Another important document today is the description of the new guarantee scheme: the details are here.

Non-Anglo Haircut is What Matters for Taxpayer

I flagged this last night but, going by the discussion we’re having at the previous thread, I think it’s worth saying a bit louder. The only thing that matters for assessing the potential cost to the taxpayer of NAMA overpayment is the average haircut on non-Anglo loans. Anglo is a nationalised bank and this transaction is one arm of the state paying another arm of the state.

So we simply do not know right now the extent to which the taxpayer may be exposed. Nor should stock markets really know how to react to this information when valuing AIB and BOI, unless they have been supplied with information that we don’t have. However, the “cowboy factor” makes it likely that the discounts applied to Anglo (and perhaps EBS and INBS) will be greater than those for AIB and BOI. So I’d be pretty confident that the haircuts for these banks will be less than the 30% average.

We know that the markets were expecting something like “the stockbroker scenario” involving a discount of about one-quarter (the stockbrokers gradually increased their estimated haircut over the past few months as irresponsible, mischievous, destabilising and opinionated economists lead a public fuss about the price to be paid for the assets).

Can we be sure that the average haircut of 30% announced today implies a larger haircut for the two main banks than was anticipated? Well we know that AIB and BOI are transferring €40 billion in book value loans to NAMA. A discount of a quarter would imply payment of €30 billion. Since we are paying €54 billion for the loans, this would imply paying €24 billion for the remaining €37 billion in loans which would be an average haircut of 35%. That seems perfectly plausible to me.

So, as regards the future of our two main banks, I don’t think we know any more than we did this morning. And yes fellow NAMA anoraks, the failure to announce any details about the two types of bonds is incredibly annoying and, frankly, hard to justify on any grounds that I can think of.

Update: AIB telling media that the discount on their €24 billion of assets (€17 billion in land and development) will be less than the average discount of 30% and that they will only need to raise €2 billion. AIB shares up 26% in after-hours trading in New York. BOI up 16%.

NAMA Details

NAMA background documentation here. No announcements about average haircuts for AIB and BOI and how much of the average 30% discount is in the Anglo loans. Very disappointing.

NAMA From Heaven?

Fianna Fail Deputy Sean Fleming appeared on RTE’s Six-One News last night and said the following:

There’s a lot of confusion on this. NAMA … The banks … This money is being borrowed from the European Central Bank. The taxpayer is not contributing any of this money tomorrow. The European Central Bank is providing all the money and all that has to happen is that during the ten years of NAMA or thereabouts, they will repay those loans back.

Today, Minister Willie O’Dea appeared on Morning Ireland and said:

The ECB have undertaken to make these bonds available to NAMA at one and a half percent.

Appearing on the same program, Fine Gael’s George Lee objected to this statement as being false, so Minister O’Dea rephrased his position as:

The ECB has agreed to give NAMA money … If the ECB disagreed so fundamentally, as George Lee suggested, with the plan, then they wouldn’t be prepared to come up with the money.

I suggest to our readers that the following are facts:

  1. NAMA will purchase loans from the banks with bonds backed by the Irish taxpayer.
  2. The Irish government, in the form of NAMA, will be paying interest on these bonds to the Irish banks at an initial rate of approximately 1.5 pecent.
  3. The ECB is not lending NAMA money at 1.5 percent.
  4. The ECB is not lending NAMA money at all as to do so would violate the EU Treaty’s prohibition of monetary financing of government. (Click here and read Article 101.)
  5. The ECB’s current operating rules mean that it will lend to any bank that has eligible collateral and government-backed bonds are eligible collateral
  6. The taxpayer is contributing the money to pay for the NAMA assets because the taxpayer will have to pay the interest and the principle on these bonds.

I would be interested in finding out does any contributor to this site think that any of the above statements are not facts. Anyone wanting to read an earlier description from this site of the relationship between NAMA, the banks and the ECB can click here.

(Beyond facts, I would point out that to argue that the taxpayer is not contributing money to buy NAMA assets is equivalent to arguing that the taxpayer is not liable for the public sector pay bill because this is being paid for by IOUs.)

Now ask youself. Are Deputy Fleming and Minister O’Dea (both highly trained accountants) unaware of these basic facts about the operation of the most important government financial decision in the history of the state? Or are they aware and deliberately peddling inaccuracies about how NAMA will work?

Then ask youself: Which scenario are you more comfortable with?