Category: Banking Crisis

The O in IOU Stands for Owe

Just heard on RTE’s The Frontline from Minister Mary Hanafin (seconds before a very angry man got up to shout at Pat Kenny):

First of all, we’re not borrowing to pay NAMA, em to pay the banks. What we’re doing basically is giving a bond or an IOU and we’ll be getting €77 billion worth of assets in return.

By the same logic, we’re not borrowing to fund the budget deficit either. We’re just issuing bonds, or IOUs if you like, to people in international financial markets and we’re getting cash in return. Sort of makes you wonder what all the fuss is about. Still, it’s good to know that the NAMA bonds are buying us €77 billion worth of assets.

The Extension of Bank Guarantee Systems

Aviram Levy and Fabio Panetta make an informative contribution on this topic in this VOX article.

Risk Sharing and Accounting Issues

Not too long ago, the Green Party announced with great fanfare that they were getting the NAMA plan amended to feature “equal risk sharing” between the government and the banks (though not between the government and bank shareholders as proposed by Patrick Honohan). Even as it was announced, there were strong rumours that this risk sharing element would represent a tiny change to the original plan. This has now been confirmed.

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Interaction Effects of the Bank Liability Guarantee and Asset Purchase Schemes

Both the Irish bank liability guarantee (instituted in September 2008 and likely to be renewed) and the asset purchase scheme (likely in place soon via NAMA) have been controversial, and their strengths and weaknesses have been widely debated.  Less attention has been paid to the powerful interactions between these two schemes.   If both schemes go ahead, perhaps these powerful interactions could serve to improve overall cost-efficiency and policy effectiveness.

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NAMA SPV Opportunity for Private Investors: Form an Orderly Queue

Via RTE, we find out about the dividends to be paid to the NAMA Master SPV’s private investors

The private investors, along with NAMA, will receive an annual dividend linked to the performance of the Master SPV. According to a briefing note issued to TDs today, this will be capped at the 10-year Irish Government bond yield at the time the dividend is declared.

When the SPV is wound up, the investors will be re-paid their capital only if the Master SPV has the resources. They will receive a further bonus of 10% if the Master SPV makes a profit.

So, if NAMA loses money, the private investors will lose all of their €51 million, while if NAMA makes money, they will receive a maximum of Irish government bond yields plus 10% over ten years.

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