The National Asset Management Agency (Nama) remains constantly in the limelight as the process of setting up the agency gains momentum. This can be seen from the recent ads for firms to apply for legal and banking advisory roles. Legislation is expected to be presented to the Dáil by mid July.
The aim of Nama is to let the banks draw a line under their problem loans and begin lending again. The Swedish model of a form of Nama is the most commonly referenced version of an Asset Purchase Company (APC), which Sweden created following its property meltdown in the early 1990s.
The issue over the haircuts applied to the transfer of loans into Nama has added to the controversy about the agency. Some worry that a low discount will be set to bail out banks and property developers, resulting in Nama paying a higher price than its should for the loans and leaving the taxpayer shouldering the cost. This is then used as an argument for following the alternative solution of nationalising the banking system. But nationalising the banking system is not a way out of our predicament, for several reasons.
Banks are covered under the guarantee scheme introduced in September of last year. The scheme did not prevent €14.5bn in corporate deposits leaving the nationalised Anglo Irish Bank as investors became concerned about the government's ability to compensate them if they suffered losses.
Consider the effect that nationalising domestic banking would have on banks' deposit books. We then convert a guarantee, under which no money has been put on the table, into an actual liability on the state's balance sheet. The amount of cash needed for the day-to-day operation of the banks would make the €10bn the Central Bank has made available to Anglo Irish Bank look like a drop in the ocean.
Like it or not, Ireland is in the hands of the international bond markets due to the large government deficits we will run in this and future years. These investors would take a negative view of the nationalisation of the banking system and taking on all of the liabilities onto the state's balance sheet. Defaulting on any of the debt covered under the guarantee would be seen by bond investors as a government default and they would shun issuances by the state. This would raise the prospect of a bailout from the European Central Bank and the potential loss of economic sovereignty.
Nama is a solution to the banking crisis, but I am not saying there will be no cost to the taxpayer. The haircuts will be determined by what the banks can take without requiring large injections of capital. The cost of the scheme in several ways will fall back on the taxpayer, as the issuance of government bonds to pay for the loans purchased by Nama will increase our debt-to-GDP ratio to 100% and beyond. This will increase the cost of financing the national debt which will be borne by the taxpayer.
The final cost of Nama is unknown and may stay that way for many years, but the structure being put in place does allow the state to pay for it over several years, and it lets the state maintain economic sovereignty. And being optimisic, as Nama will be able to take a long view on these property loans, the agency could make a profit.
Nama is a solution to cleaning up the banks, but the government must ensure the ultimate aim of the scheme – to get credit flowing into the economy again to support business – is achieved. An economic recovery will not be achieved until the banking system is stabilised.
Ensuring that credit flows to SMEs, to create jobs and generate sustainable growth, must be a key part of Nama. The success or failure of this will determine how the agency will be viewed by future generations.
Oliver Gilvarry is head of research at Dolmen Research