This is the text of an e-mail, dated Saturday, August 15th, sent to Irish economists by Alan Ahearne, special adviser to Minister for Finance Brian Lenihan. Mr Ahearne is a former lecturer in economics at NUI Galway and senior economist with the Federal Reserve in Washington
Dear Colleagues,
If you are considering putting your name to this draft op-ed, could I ask you please to have a look at the attached piece that I prepared for tomorrow’s Sunday Business Post. I hope it will convince you that there are two sides to this story and the issues are much more complex than presented below.
Many of the questions raised in Brian Lucey’s piece will no doubt be debated vigorously over the next 6-8 weeks as the Nama legislation makes its way through the Dáil. The reason the proposed legislation has been published in draft form is so that Deputies, Senators and the public can have an opportunity to consider it prior to its formal publication as a Bill in September.
As you know, the Dáil will return on September 16th to commence debate on the published actual Bill in the context of a wider debate on the future of our financial sector. The publication of the legislation in draft form will facilitate an informed debate at that time.
I would like to briefly point out some of the deficiencies in the note you have been asked to sign:
– “The first is the perceived lack of transparency.” This is wrong. The draft legislation sets out that Nama will be accountable to the Oireachtas in the usual manner. The agency will report to the Minister for Finance and reports will be laid before the Oireachtas. Nama accounts will be subject to audit by the CAG.
– “Duration and scope of Nama.” Issues relating to the scope of Nama are dealt with extensively in the draft legislation. I would invite you to read the legislation for yourself on this matter (and indeed on all other matters). It should be obvious that it would not be helpful to specify an end date for Nama in the legislation, since this might force Nama to engage in a firesale of assets in its final year.
Flexibility in this regard is for the protection of the taxpayer.
– “Nama . . . will not necessarily pay market prices for land and development.” Nama will not buy land and development; Nama will buy loans secured on property and other assets. There is a fundamental distinction. Moreover, there is no market at present either for land and development or for loans secured by land and development. That is why Nama is being set up. A “market price” does not exist. That is why the legislation and the EU Commission guidelines use the term “market value” instead of market price.
– The piece goes on to talk about adjusting upwards to “fair economic value”. Nowhere in the legislation is the term “fair economic value” used. The legislation uses the term “long term economic value” which is an EU term that the legislation is following.
– “In a reasonably short term property and development prices will rise.” This is wrong. Nowhere in the legislation has such an assumption been made. No one associated with the establishment of Nama has ever said that prices will rise in the short term. For the record, property cycles are 7/9 years in general.
– “Optimistic forecast of the Irish economy in the medium term.” This is wrong. No such assumption is made. That said, medium-term forecasts from the ESRI, IMF etc all project an eventual recovery in the Irish economy.
– “Price for land and speculative developments greatly in excess of the market clearing price.” There is no “market clearing price” for land and development under current conditions.
Nowhere in the legislation is this term used.
– “General government deficit of close to €30 billion.” This is wrong and terribly sloppy. The GGD is projected to be €18 billion for 2009 and the consensus view is that it will not exceed €20 billion. The sloppy and at times misleading use of inaccurate numbers by some commentators has been a disturbing, and indeed sometimes damaging, feature of the economic and financial debate in this country.
– “It remains very probable that Nama will run at a loss.” This is wrong. Please see my comment about sloppy use of numbers above. Based on data supplied to date by the banks to Nama (which are currently being subject to due diligence by Nama), the agency should be self-financing.
– “True value of the loans is . . . closer to €30 billion.” Nama has requested 300 pieces of information about each borrower. Each loan will be valued separately and the actual amount of the discount will depend on a large range of factors including the quality of the underlying property and other collateral. The valuation methodology will have to be approved by the EU Commission. I’m afraid that anyone who is trying to suggest that they can make a reasonable guess at the “true value” of the loans without knowledge of any of the details about the individual loans is either delusional or is being disingenuous.
– “Cajoling or otherwise nudging the bondholders to engage in some debt for equity swaps.” This shows a startling lack of understanding of the bondholders’ position. They are covered by the State guarantee and in fact these bondholders may well have bought following the introduction of the guarantee. Any attempt to swap debt for equity is a default on the bonds that are guaranteed by the State.
– “What is required is a working, healthy, banking system.” At least we are agreed one thing, which is: the object of the exercise is to conclude with a working healthy banking system. The remainder of the piece does not explain how taking over the banks would move to achieve a swift reorganisation and a returning of a reorganised banking system.
I hope you agree that what you have been asked to sign is a rather poor piece that unfortunately does nothing to inform this crucial debate.
Best wishes, Alan