Last Saturday, I gave a short presentation to a meeting of Labour Party members on the subject of The Banks After NAMA. Here are the slides from the presentation.
The NAMA Bill has passed all stages of the Dail and is on its way to the President. Worth marking with a thread, I think.
What do you think of the final bill? The draft bill was released in August to allow for debate and suggested improvements. Did this process work well? Is the final bill much better than the original draft bill? Will the passage of the bill stabilise the banking system? Will it get credit flowing?
RTE news had a story last night on a report on the Irish hotel sector written for the Irish Hoteliers Federation by Peter Bacon.
The highlight:
John Kilraine: Economist Peter Bacon, who compiled today’s report, said across the country zombie banks are allowing zombie hotels to remain open because they owe the banks a lot of money.
Peter Bacon: The problem is the most insolvent hotels are not the ones that are going under and the reason they’re not going under is because it’s not in the banks’ interests to foreclose upon them.
And the reason it’s not in the banks’ interests to foreclose on the insolvent hotels is because the banks want to sell these loans on to NAMA at their “long-term economic value”. Why foreclose on them now when you can get NAMA to carry the can? The report recommends that stakeholders
should ensure that banks fully recognise bad loans within the hotel sector and face any capital adequacy issues which might follow.
The report also warns about the potential damage to profitable hotels if NAMA shows forebearance to those hotels with bad loans.
Now if I recall correctly, the NAMA plan was recommended to the government by an economic consultant of some sort.
Writing in today’s Irish Times, property consultant Bill Nowlan writes:
Nama’s prime job is to get back the €54bn given to the banks to enable it to repay the ECB.
I don’t want to pick on Bill Nowlan because this kind of comment appears regularly in all our media outlets from commentators who are attempting to explain NAMA to the public. However, I do think it is worth pointing out that NAMA is not borrowing money from the ECB.
What I find odd about this is that a plan that really isn’t very complicated—the Irish government issues bonds to the banks in return for property-backed loans—has been described so often by government sources as a complicated operation involving the ECB that pretty much everyone now believes that this is the case. But really, it’s not.
I’m really not sure what I can say about this other than it’s pretty sad that a program involving spending €54 billion of public money is so poorly understood.
The Government charged the banks €1 billion for the two-year guarantee announced on 30 September 2008. How was this amount arrived at, and does it represent good value for the taxpayer?
According to the Annual Report of the Comptroller and Auditor General issued in September 2009 (available here), the charge of €500 million per year appears to have been calculated as:
{The increase in the cost of funding government debt due to the guarantee}TIMES {The liabilities covered by the guarantee}
The former was set at 0.15%. Liabilities at the end of December 2008, as shown in Figure 23 of the C&AG Report, came to around 345 billion. The product of these two terms comes to around 500 million. (Not an exact match because average rather than end of quarter figures would presumably have been used).
The 0.15% figure comes from the “the advice of the National Treasury Management Agency .. that the cost of funding Government debt would rise as a result of the guarantee by between 0.15% and 0.3%”.
Note that the lower figure was chosen, while many might argue that even the higher value is low, given the extent of the spread over German rates (though part of this is due of course to the budgetary crisis).
Figure 23 of the C&AG Report indicates that the expansion in the Deposit Guarantee Scheme announced on 20 September 2008 (which raised the guarantee per depositor from around €20,000 to €100,000) was not charged for. This would have raised the second term in the equation from 345 billion at end December 2008 to 427 billion. (According to footnote 15, the Deposit Guarantee Scheme is apparently “not regarded as a State guarantee”).
Note also that the charge is based on the cost to the government, not on the value to the banks, which would have been very high. Section 7.23 of the C&AG Report reports however that “account was also taken of the capacity of the covered institutions to pay the charges”!