Month: May 2011

Frank Daly on NAMA Providing Finance

NAMA Chairman Frank Daly gave an interesting speech today. NAMAWinelake analyses the speech in detail here.

Daly discusses how NAMA may get sales going in both the commercial and residential property markets. In terms of commercial property, Daly describes how NAMA can provide finance in a simple and clear manner which hopefully will dispell some of the confusion about this issue when it first came up (the point of this post was that it was a very simple issue but that didn’t stop us getting various comments about where would they get the money from, the whole thing being circular and Ponzi schemes and the like …):

To illustrate how stapled financing might work in practice, let us take the case of an investor who wishes to buy a property asset from a NAMA debtor or receiver but who cannot source any funding or sufficient funding from banks even though he is willing to contribute 30% equity. Assuming a purchase price of €100m, the investor would pay €30m upfront to NAMA and then enter into a loan agreement for the residual €70m which would see him repaying the principal on an amortising basis to NAMA over a five/seven year horizon. The original debtor’s outstanding obligations to NAMA would fall by €100m. The net impact for NAMA would be positive in a number of respects. It would have generated a transaction in the market which would not otherwise have taken place. It would have replaced a loan of €100m with what is likely to have been a weaker debtor with a performing loan of €70m with a stronger debtor, thereby reducing and diversifying its credit risk. It would also have a cash receipt of €30m which it could then use to reduce its own debt. In reality, it does not require any new money from NAMA; it is a recycling of existing debt but achieving a significant cash payment upfront.

The comments about selling residential properties are more interesting. Because the maturity of most residential mortgages extends well beyond NAMA’s projected lifespan, they are keen to get involved with the two pillar banks to provide mortgage finance. Interestingly, NAMA appear to be willing to provide funds to insure purchasers against future price declines:

Our aim would be to unveil a product with the two banks in the early autumn which meets a number of key criteria: one which generates sales of property controlled either by NAMA debtors or by receivers yet provides an incentive to purchasers to invest at current prices in the knowledge that there will be a mechanism in place which will offer them protection against the risk of negative equity in the event that prices should continue to fall. Given that NAMA is effectively providing state funds for this purpose and the pillar banks will be largely state owned, it raises a question about whether such mortgages should be offered beyond the limited set of residential properties owned by NAMA.

Finally, this passage will prove popular with many:

A number of debtors appear to be trapped in the old mindset whereby it is they and not the lender who sets the terms on which business is done. It is akin to falling overboard and then complaining to your rescuer about the colour of the lifebuoy that he is about to throw in your direction. Some of them have difficulty surrendering the grandiose lifestyles that they seem to regard as their continued entitlement, even if the rest of us are expected to pay for it through higher taxes and cuts to services in our schools and hospitals. We have and will enforce against such debtors. If the taxpayer is being asked to keep you in business, it would seem to be a matter of basic common sense that you do not seek to maintain a lifestyle that is beyond your means. The taxpayer does not owe you a living and certainly does not owe you an unrealistic lifestyle if you are not in a position to repay your debts.

Tough words. Let’s see if they’re accompanied by corresponding actions.

Mortgage Arrears: March 2011

The latest quarterly report on mortgage arrears from the Central Bank is available here. The report shows a continuation of the steady increase in the fraction of mortgages that are more than 90 days in arrears. This fraction rose from 5.7 percent in December to 6.3 percent in March, in line with the previous increases over the past year.

49,609 mortgage accounts have been in arrears for more than 90 days. In addition, 62,936 mortgages have been restructured with 36,662 mortgages that have been restructured but which are classified as performing and not in arrears and 26,274 again in arrears.

Decision-Making Biases and the Irish Banking Crisis

An interesting new working paper by Peter Lunn in the ESRI looks at decision-making biases and the Irish banking crisis. The article outlines extrapolation biases, confirmation bias, overconfidence, ambiguity aversion, behavioural convergence, time inconsistency and loss aversion as potential contributors to the banking crisis. There is a lot of interesting material in the article. One issue I have is that many of the biases outlined are general mechanisms and so don’t give a theory as to why Ireland, in particular, had such a dramatic crisis that was so systemic. I think ultimately a behavioural theory of the Irish banking crisis should have some interaction mechanism perhaps with country size or network density. Another area that I think should be developed is the extent and determinants of underdiversification in Irish household wealth portfolios both in terms of country concentration and asset class concentration. I am writing a lengthier comment on this and will link from this post, but put the paper up for now for info.

Death of Garret FitzGerald

In addition to his political career, Garret FitzGerald made a huge contribution to the analysis of the Irish economy over many decades. Deepest condolences to his family.  News article here.

Between Two Stools

In the Eolas piece I looked at Ireland’s policy options taking the European bailout/bail-in regime as exogenous (albeit uncertain).   Of course, a different question is what we would want that regime to be, one now being hotly debated given Greece’s new difficulties. 

A central focus in the recent debate is the proper extent of early private sector involvement (PSI) in bail-ins.   Looked at from an Irish perspective, a range of considerations come into this calculation: (i) the reputational damage in a debt restructuring/default; (ii) the ultimate reduction achieved through a restructuring in the net resource transfer; (iii) the risks associated with increased dependence on official creditors and their domestic politics; (iv) the risks of domestic and international contagion; and (v) the implications for future market access of a weakening of the implicit guarantee given to private creditors. 

 I think the last of these points deserves additional discussion.   At the moment we seem to be between two stools.   Early PSI is ruled out; but PSI is central to the post-2013 ESM regime, substantially weakening the implicit guarantee and scaring off potential new creditors.   Thus there is a certain incoherence at the heart of European policy.   It also is a particularly bad combination given the trade-off involved with any resolution regime: it is good to be able to share losses with private creditors ex post; but a regime with easier loss sharing will weaken the implicit guarantee and make you less creditworthy ex ante.   

We need European policy makers to move one way or the other, either allowing early PSI before a substantial amount of private debt is paid back, or providing clarity on the nature of the implicit guarantee that gives a feasible route back to the markets for countries that follow through on their adjustment programmes.   The ECB seems to be calling for a full guarantee by effectively ruling out defaults.   This seems neither likely nor desirable.   However, further clarity on the way PSI will be applied in the future, with a reasonable path to avoiding it, would give a country a chance of regaining market access and not having to resort to default.   It is probably unfortunate for us that policy precedents are being set in this area based on the quite different Greek situation.