ANALYSIS: The focus in the Dáil today was always going to be on the figure – the Minister for Finance Brian Lenihan's announcement of the famous haircut that Nama will apply to the assets, writes HARRY MCGEE, Political Staff
The haircut was never going to be as severe as a fall to market value (on current estimates, property has fallen 50 per cent since the peak of the market in late 2006). So, it was always going to involve a gamble and a punt.
The only matter that would be settled today was the extent of the gamble; whether the Irish taxpayer was backing a racing-certainty or a beaten docket.
In the event, the haircut was as had been widely predicted for weeks: 30 per cent. The figure that caused a frisson of surprise was the book value of the loans that will be bought up by the assets recovery agency. The figure that has gained most currency was one of €90 billion, although in recent weeks Lenihan has been talking that down.
He said that it was between €80 billion to €90 billion when he appeared before the Oireachtas Finance Committee. But his announcement today of €77bn was lower than anybody had been forecast. The reason for this is that banks themselves have written down their own loan books in recent months.
There was a suspicion among some commentators in recent weeks that the Government was allowing higher figures to be bandied about to make the
bitter pill administered today a little more palatable. One assumption was that the haircut would be 35 per cent and 45 per cent and not the predicted 30 per cent.
But while the discount is 30 per cent, the lower book value means that the banks will be paid €54 billion for the loans. Lenihan said that the current estimate of the market value is €47 billion. Therefore, the premium paid by the State for the loans (the so-called Long Term Economic Value) is €7 billion, which does not seem astronomical in the context of the massive figures that have been bandied around.
For Nama to break even, he said would require less than a 10 per cent uplift in the value of the assets underlying the loans. On the face of it, that does seem a comparatively modest aspiration. It is backed by a number of factors. A third of the loans, Lenihan said, were outside Ireland, and it is generally agreed that property in the UK and the US will recover much more quickly than in Ireland.
The scheme also involves risk-sharing but it is a variation on the model first put forward by Professor Patrick Honohan, now the Governor of the Central bank. Some 5 per cent (or €2.7 billion in money terms) of the overall consideration of €54 billion will be in subordinated bonds.
And some 40 per cent of the loans are producing a cash flow and are, therefore, performing. But the risks are enormous. Richard Bruton of Fine Gael referred to the massive ‘hope’ factor.
Or as financier Dermot Desmond said today in The Irish Times: "Asking the taxpayer to accept blind valuations of property or other loans is not a solution. No matter how well intended the valuers, the only certainty is that no one knows the future."
The first risk relates not only to the €7 billion premium but the assumption that the market value of €47 billion is correct and will not fall further. The second assumption that the value of assets will recover (albeit at a relatively modest rate) is not a given either.
The Irish property market was so obscenely bloated that public sentiment may only allow a snail-like recovery of value that could take many years.
It’s a punt and less than what was imagined. Lenihan relied a lot on the imprimatur given by John Hurley and Patrick Honohan, the outgoing and incoming governors of the Central Bank, both of whom said that the proposed add-on of 15 per cent to 18 per cent of current market value did not seem disproportionate when the risk-sharing element is included.
The other astounding figures that leaped out of the page were the extraordinary damage caused by two relatively small commercial institutions. Anglo Irish Bank hsa €28 billion of loans being transferred to Nama, making it the most exposed of the five institutions.
Irish Nationwide also has €8 billion being transferred. To put it in context, that’s half of the €16 billion being bought by Nama from Bank of Ireland, an infinitely larger bank.
The other major question relates to AIB. It will sell €24 billion of loans to Nama. On the face of it, the losses arising from the discount may force the State to take a majority stake. The bank tonight said it might have to raise €2 billion in capital and expressed confidence that it could do so privately.
The other big question that can not be immediately answered is if Nama will bring liquidity into the market, and clean out banks sufficiently to allow them lend again to small and medium business.
Only time will tell whether this solution will work or Nama is, as Joan Burton of Labour maintains, nationalisation in slow motion.