Day 2 of the new NAMA business plan and I’m sure people are already a little tired of it as tolerance for all things NAMA has dwindled for most of us. For those still interested, Constantin Gurdgiev has a number of useful calculations in this post.
I’ll conclude on this issue for now by making a few simple points as to why I think the outcome for the taxpayer is likely to be worse than indicated by the plan’s “worst-case scenario’’ of an €800 million loss to be recouped via a levy.
1. Dubious Valuations and the AIB Lower Bound: Every time NAMA look more closely at the portfolio, it gets worse. Given these trends, it is perfectly possible that once they have assumed ownership of the first tranche and looked at future tranches, which have more land and less investment property than the first tranche, the valuations set out yesterday will prove optimistic. Prices paid may also turn out to be lower than listed in the plan. However, the first tranche has already been paid for and the desire to keep AIB out of full nationalisation is likely to keep prices paid up to a certain level.
2. Lower Recovery Prices: The current market valuations are dated as of November 2009. The government’s own restructuring plan for Anglo conceded (see note 41 in the Commission’s response) that property prices would fall in 2010 and 2011. If the value of these properties fell another 25 percent from late 2009, then obtaining the 10 percent long-term economic value “uplift” would require an increase in values of almost 50 percent from the bottom of the market (calculated from 1.1/.75 = 1.47 but you can fill in your own figures.) The business plan’s base case assumes that NAMA will realise the full long-term economic value on all properties. In practice, it seems more likely that NAMA will gradually sell off properties over the years: This may involve the average realised property price being less than the November 2009 value, a scenario not considered in the plan.
4. Rising Euribor rates: The previous business plan showed NAMA paying out more in interest than it took in from loan repayments. The current business plan doesn’t bother showing us this information but it appears that this is still the case. When the ECB eventually tightens, this will raise interest payments from NAMA because these are linked to Euribor. With so few borrowers repaying, there is unlikely to be as large a response from interest payments into NAMA. It is possible that the business plan calculations have fully factored this in to their calculations but, again, we just don’t know.
5. The Levy: But sure, won’t we recoup it all with a levy, I hear you say. Don’t bet on it. The Irish government needs to unwind its ownership position in the banks in the coming years. If there is a threat of a potentially large levy hanging over the banks that could potentially deter private investors. If the losses start piling up, I see the levy as something that will likely be shelved. Note, my opposition to a post-dated levy isn’t new. I said in April 2009 that it was “a pretty terrible idea” and also wrote at length about it in October.
That’s my read on it. Arguments running to the contrary welcome as always.