Author: Karl Whelan

Mr. Keenan and Political Economy

A common jibe that journalists and politicians level at academics they disagree with, or perhaps just plain don’t like, is that the academics are disconnected from reality by virtue of their ivory tower employment. In relation to economists, this often takes the form of the tired line about the discipline originally being called “political economy” and academics putting forward proposals that are “good economics” but “bad politics”.

Brendan Keenan’s column in today’s Sunday Independent is a classic example of this genre. Mr. Keenan argues that the various economists associated with this blog (the “dissident economists” formerly known as “opinionated economics lecturers”) are politically naive and their advice unsound. Specifically, Keenan proposes that we would be better off if, contrary to recommendations emanating from this site, the government had paid more to the banks for the NAMA loans and demanded lower capital ratios.

There is such a thing as political economy. Anglo would still have been a nightmare, but a somewhat more generous payment from Nama, and a less stern view on bank capital, would have made the numbers a lot less frightening.

That might have made it easier to get the deal with the trade unions approved, and get another unpleasant Budget through in December. Not only better politics, but possibly better economics than worrying about Tier One capital and Long-Term Economic Value.

I’m not sure that either the politics or the economics of this column are particularly compelling.

Continue reading “Mr. Keenan and Political Economy”

More Secrets from the NAMA Temple

The EU Commission has released the full text of its decision to approve NAMA announced on February 26. Emmet Oliver discusses the statement in today’s Independent. Thanks to Jagdip Singh for the hat tip. What I find frustrating about this process is why we get a minimal “EU approves NAMA” statement in February and a slightly-censored version of the full approval six weeks later. It would be far preferable for the full text to be released at the same time as the announcement of the decision.

Thanks also to Jagdip for getting us more information on the “NAMA total consideration” mystery. As outlined in his comment, Jagdip wrote to NAMA:

Dear Sirs,

I have studied your four publications from Tuesday 30th March 2010 with respect to the transfer of the first tranche of loans to NAMA. I write to ask if you could make publicly available the overall methodology to derive the Long Term Economic Value (LEV), Current Market Value (CMV) and consideration paid with respect to the first tranche of €16bn of gross loans.

In summary the gross loans of the first tranche are estimated at €16.03bn, the LEV is shown as €10.51bn, the CMV as €9.44bn and the consideration paid is €8.51bn. Could you explain in general terms how the LEV and CMV were calculated and why the consideration paid is different to the LEV.

Also the press have widely reported the estimated haircut on the first tranche at 47%. Would it be more accurate to quantify the haircut as 34% (1 – LEV/Loan Value or 1 – 10.51/16.03)?

I have read the Act and the LEV Regulations before writing to you and I can still not resolve the figures produced for the first tranche. I propose publishing any response from NAMA to the above questions on the irisheconomy.ie blog.

Jagdip received a reply (Garbo speaks!):

Thank you for your email.

Please see below a brief guide to how NAMA obtains these calculations:

1. The €16.03bn is the nominal value of the loan balances transferring to NAMA.

2. The property CMV represents the current market value of the property as at 30 November 2009.

3. An LEV uplift factor is applied to the property CMV to arrive at the property LEV which is one of many inputs to the valuation methodology to arrive at the consideration NAMA will pay for any of the transferring loans. In addition to the LEV of the property, the loan valuation is determined by reference the discount rates per the valuation regulations taking account of enforcement costs and the legal due diligence levy, and the potential for legal haircuts regarding defects in security and title amongst other inputs which influences the consideration paid by NAMA for the loans. The average LEV uplifts per participating institution are available on our website.

4. The discount applied can therefore be calculated as: (1- (Consideration paid/Loan balances at transfer)).

Some additional information is available on our website http://www.nama.ie.

As Jagdip notes, “defects in security and title” are likely to be the principal explanation for why the “total consideration paid” for the first tranche was below the “current” (i.e. November 2009) market value of the underlying assets. I think this means that the signed copy of the 46 guy letter is on its way to an anonymous NAMA official, who I’m sure will treasure it.

Between this reply and Brian O’Neill of NAMA’s letter to the Irish Times commenting on Brian Lucey’s criticisms of their ingenious linked-to-Euribor strategy (Brian’s original article here and reply to NAMA here) there is some sign of NAMA becoming a somewhat less secretive organisation. This is a welcome development though I suspect those who ask tough questions may find limits to this transparency.

The Impending EU\Greece Deal

It appears that a deal involving the EU and Greece is imminent. Greek bond yields hit their peak level in the current crisis, the ECB has altered its rules for collateral and the media are reporting that a deal is in place (here and here.)

The FT reports on the negotiations over the terms of the deal:

Officials added that Germany was sticking to its demand that the eurozone portion of the loans would have to be made at or near Greek market rates of 6 per cent or more, though this could lead to different rates being charged by other countries.

One said the agreement “reflects high rates … it is not a ‘subsidy’ and thus not a climbdown. Not even the Germans regard most recent rates as market rates”.

The FT also editorialises on this, blaming the Germans for failing to calm the bond markets sufficiently:

Berlin is also adamant liquidity support be given at market rates. This makes no sense: a rescue is needed precisely when debt markets cease to function and refuse to refinance Greece at sustainable rates. Insisting that a rescue takes place at “market rates” is to insist no rescue takes place at all. Market yields reflect this contradiction, and show that Europe has not yet put its money where its mouth is.

I have a tendency to question agreed wisdom so let me play the role of academic devil’s advocate here for a second. Ultimately, Greek fiscal stability will require a combination of lower spending and higher taxes. Yes, bond yields at current levels—if sustained—would be unlikely to be consistent with long-run fiscal stability.

However, a program that

(a) Made it clear that Greece would be able to roll over private sector debt because the EU will intervene to provide the funds

(b) Credibly lead to the adjustments in Greece’s structural deficit.

should stabilise the fiscal situation in Greece and lead to a return to lower borrowing rates for Greece. That the EU should charge a high interest rate for providing the funds for (a) and overseeing the program for (b) is, it could be argued, not unreasonable. Indeed, if the rates associated with (a) are not high enough to be painful then it may be difficult to get much traction going on (b).

Of course, the Greek government is going to look to get the interest rates on its assistant loans set as low as possible. But that doesn’t mean that a percent here or there on these loans is the key issue right now.

The other major unknown here is how any deal will affect the sovereign bond market’s attitude to Ireland.

Eddie Molloy on Finance and the Public Service

I know Philip linked yesterday to the first of his articles but I think it is worth having a thread on Eddie Molloy’s two articles on the Department of Finance and the public sector (here and here.) To my mind, most of his opinions are spot on. I can certainly relate to his opinions in relation to the misplaced belief in generalists and in the absence of management skills. But, of course, most of this material has been aired before. The question is whether the current crisis is likely to generate sufficient momentum to finally generate the kind of reforms that people have been talking about for many years.

Anglo and Quinn

Let me see if I have this right. Quinn Group has debts of €4 billion, €2.8 billion of which is owed to Anglo. Quinn Group used some of this money to acquire shares in Anglo which it has lost about €3 billion on. Now Anglo is proposing to take over Quinn Group including its insurance arm but the Financial Regulator isn’t happy with this idea and is going ahead with appointing administrators for Quinn Insurance. (Irish Times story here.) And people are on the streets protesting against the Regulator, apparently favouring a return to light-touch regulation. It’s all pretty strange stuff.

The serious point here: We are where we are in large part due to very serious regulatory failures. If the first time our new regulator steps in and deals with what he sees as serious failures to comply with regulations, there is any sense of the government (any arm of it) stepping in to protect those who failed to comply, then this would do serious damage to our attempts to build an image of having made a fresh start on the regulatory front.