EU approval heightens Nama fears
The reaction of the bank share prices to the announcement that the EU had finally approved the Government's plans for Nama said it all.
Far from rising on the news that Nama had cleared the final hurdle before it could start operating, shares in both AIB and Bank of Ireland fell on investor fears that Brussels would insist that Nama received a larger discount on the bad loans it purchased from the two main Irish banks.
When Finance Minister Brian Lenihan finally revealed his detailed plans for Nama last September he proposed that the new organisation would pay €54bn for bad loans with a book value of €77bn, an average discount of just under 30 per cent. Friday's statement from the EU Commission signing-off on Nama revealed that it would now be purchasing loans with a book value of €80bn for the same €54bn, a discount of 32.5 per cent.
In practice, the actual haircut imposed on the Irish banks by Nama is likely to be much greater with the European Commission warning: "Today's approval concerns only the Nama scheme. The commission will assess the compatibility (and, in particular, the actual transfer price) of the transferred assets when they are separately notified by the Irish authorities.
"These individual reviews will include a clawback mechanism in case of excess payments."
Which, when translated into real English, reads something like "don't even think about paying over the odds for bad loans or try using Nama as a slush fund to bail out politically well-connected developers".
Given that the Government is relying on the ECB to underwrite the €54bn of bonds that it will give the banks in return for their bad loans, it would do well to heed the commission's warning.
As it has become clear that Nama is going to be the boondoggle that many observers had originally feared, both the AIB and Bank of Ireland share prices have slumped.
Last Friday's news did nothing to help matters, with the AIB share price dropping a further two cent to just 96¢ at one stage, down 29 per cent over the past month, and Bank of Ireland slipping by 1.5¢ to €1, down 28 per cent over the past month.
With mounting evidence from the Commercial Court that the real fall in property values had been much greater than 30 per cent, last week the court heard about a site in Athlone that had been valued at €31m in 2006 but was now worth just €600,000. It seems unlikely that a 30 per cent discount will pass muster with the commission.