IT'S unpalatable, it's unfair and it could be very, very expensive, but Nama – warts and all – is the only show in town.
Labour leader Eamon Gilmore is absolutely right when he says Nama is not supported by the public. But that completely misses the point. No plan that involves putting taxpayers' money into banks, which have behaved so irresponsibly in recent years, is going to get public support.
However, it is the duty of a government to govern (despite Sinn Féin's patently daft proposal that Nama be put to a referendum). For the economy to recover, the banking mess has to be cleaned up. And whatever way you do that, it is going to involve investing billions upon billions of taxpayers' money, hopefully with the prospect of a return in the future.
Nobody has put forward a viable, sensible alternative to Nama. Labour's proposal that the banks should be nationalised is highly seductive, with its promise that the taxpayer will benefit from any increase in the value of the bank. But the nationalisation option throws up enormous difficulties. The state would have to pay in the region of €5bn to shareholders of AIB and Bank of Ireland, money that would have to be borrowed. And that would be before the state did anything about the toxic loans because – and this point has been lost – nationalisation would do nothing to address the balance sheets of the banks.
The nationalised banks' ability to lend would be further hit by the fact that they would immediately have to pay off many of their bondholders, because the terms of those bonds explicitly require repayment in the event of a bank being nationalised. Anglo Irish Bank, for example, lost €1.6bn in funds when it was nationalised.
It would be extremely difficult to replace this vital capital on the international markets. There is a reluctance to lend money to banks that do not have the transparency that stock market membership brings, and that are viewed as being open to political interference. Crucial US funds would not be in a hurry to lend money to a nationalised bank system, which many of them would regard as akin to communist Russia.
Then there is the impact on the country's ability to borrow. Within five days of Anglo Irish being nationalised, the rate which Ireland is charged for borrowing money internationally had risen by one percentage point, due to concerns about the exchequer's exposure. Imagine what would happen if AIB and Bank of Ireland were nationalised.
There is a reason why no country has nationalised its entire banking system, apart from Iceland where the system was on the verge of collapse. And if we want to hang up a sign to the world saying 'Ireland is the new Iceland', the best way to do that is to nationalise AIB and Bank of Ireland.
Fine Gael's proposal for a good bank, meanwhile, has one enormous flaw: it would inevitably involve the banks reneging on their deals with senior bond-holders. These are pension funds or institutions with investments in the banks, similar to the money individuals have on deposit. Unlike subordinated bondholders, who get big interest rates because there is a risk to the principal, senior bondholders get a low interest rate because they are effectively guaranteed to get their investment back at the end of the agreed period.
Ireland and its banks have never welched on their debts (except during the economic war with Britain when the government refused to pay the hated land annuities). To default now would be a perilous move that would damage our credibility internationally. The government would be asking to borrow many billions of euros – as it needs to do over the coming years – from the very funds and institutions the Irish banks would be burning. Let's get real.
The key issue regarding Nama is its cost. On a year-to-year basis, as its chief executive has pointed out, the charging system means Nama will certainly wash its face. But what will it end up costing in 10 or 15 years, when all the loans and land have been disposed of?
We won't know the valuation Nama will put on the land that is the subject of the €90bn of loans until next month, but most of the speculation suggests the haircut will be around 30%, meaning Nama will pay around €60bn. But while the loans are for €90bn, the properties secured on those loans cost considerably more (we are not talking about 100% mortgages here). The actual amount paid by the developers is likely to have been around €120bn. So at €60bn, Nama would be factoring in a 50% – not 30% – cut in land values, which does not sound unreasonable.
Of course, there are properties in the middle of nowhere that are worth next to nothing and probably never will be worth anything. A 50% drop in value is not sufficient for them. Their "long-term economic value" will be the same as their current value – the same as that of agricultural land.
But there are properties covered by Nama that were bought long before the peak in property prices, and investment properties with a big rental income coming in, and properties on the east coast of the US where already there are forecasts of a return to growth. For such properties, a 50% depreciation is certainly over-cautious.
Previous property crashes in London, Paris and Stockholm suggest that, within 10 years, prices recover to 30% below the top of the bubble. So there is a reasonable expectation that Nama could more than recoup its investment within 10 years once the property sector begins to lift.
It is also possible that property prices won't recover, and for that reason it is sensible to go for a conservative estimate on what the properties are worth and to include claw-back measures, such as staggered payments to the banks for the loans and a possible bank levy if the 'haircut' proves over-optimistic. That will happen.
Nama is not perfect. There is no perfect solution to the crisis we are in. But an asset management company taking the bad loans from the banks is the only way to go. It fixes the balance sheets of the banks, it frees up crucial liquidity and it prevents a fire sale-led property meltdown (a meltdown some are wrongly claiming has already happened and others are quite clearly hoping for).
'Nama – the least worst option' won't win any awards as an advertising slogan, but that's about the long and the short of it.