We still need answer to the multi-billion euro question
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Friday July 31 2009
WE knew what the bank rescue scheme, NAMA, was meant to do. Now, after the publication of draft legislation, we know more or less how it will do it. What we do not yet know is the cost.
Yet it is on this -- the price which NAMA will pay for the banks' development loans -- that most economic assessment of the plan will hinge. If the banks are hit too heavily, their ability to lend may continue to be restricted. If they are not hit hard enough, the taxpayer will have to make up the difference at some time in the future.
It would not be surprising if the Government tended to have a prejudice in favour of cleaned-up, cash-rich banks now, as compared with a possible bill which will not fall due for 10 years or more, and then by instalments.
Perhaps the Government would be right to take that view. As an 18th-century Irish MP observed, "What has posterity ever done for us?" The temptation is all the greater when ministers know they won't be around to have to explain the mess.
It all depends on one's view of the final losses on the Irish property bubble. In a few weeks' time, we will know the size of the cheque. But only time -- a long time -- will tell us the real value of the loans which NAMA is buying, and just how big the bet was.
The visions from the opposition parties -- and many analysts -- are pretty apocalyptic.
It is widely expected that NAMA will buy the loans at a price which implies a 50pc drop in the value of the land and buildings being taken over. About half of that loss will fall on the banks which lent the money, and the other half on those who invested in the developments in the first place.
The taxpayer faces a loss only if values remain down by more than 50pc over the long term.
That would be a remarkably severe property crash by historical standards. Unfortunately, there is every reason to suppose that the Irish bubble and burst are one of the worst ever recorded.
The stakes are high. While a 50pc fall in in long-term values would theoretically leave the taxpayer in the clear, a great deal is still unknown about developers' finances.
There will be compensating streams of income along the way, but there is still the risk of an enormous loss for taxpayers.
It would not, however, be an apocalypse. And there is the point that, the more the creation of NAMA had helped economic growth in the meantime, the lower the real and actual burden of any final loss would be. Economies are not arithmetic. Economic growth over the next 10 years will have much more effect on how the bank rescue turns out than any amount of legal details or fretting over the value of Dublin docklands. In turn, that growth will depend more on global conditions than the actions of NAMA or the lending capacity of Irish banks.
But things could not be left as they are. The banks would be a drag on the economy unless something dramatic is done. It no longer matters whether nationalisation or selective bankruptcies would have been better policies. The NAMA approach, where loans which were crunching the banks' lending power are replaced with lovely borrowed cash, is the road which has been chosen.
The only thing we can be sure of is that, whether or not it works in the long run, in the short run there will be endless complaints that it is not working at all.
