Friday 19 January 2018


IN exchange for the banks' bad loans, the Government will print bonds, or IOUs, backed by the taxpayer and give them to the banks. They will be government bonds backed by taxes levied on the public.

What next?

Nama will pay the banks for the loans using bonds issued by the Government. These bonds can be exchanged for cash on international markets and at the European Central Bank (ECB). Mr Lenihan's adviser, Dr Alan Ahearne, has said that the Nama bonds can be sold on the open market.

UCD economist Karl Whelan said: "This has very substantial implications for how the Irish State is going to fund itself over the coming years. Nama bonds being tradable will, in effect, make the Irish banks competitors for the issuance of Irish sovereign debt with the National Treasury Management Agency (NTMA). Indeed, it may be necessary for the banks and the NTMA to co-ordinate sales of Nama bonds on the secondary market with issuance of new bonds by the NTMA."

The markets may have serious doubts whether Nama will turn break-even, let alone turn a profit. There is simply not likely to be a market for that large a quantity of Irish government bonds all to be sold off at once.

This is where the ECB comes in. Knowing that there will only be a limited market for the Nama bonds on the open market, the Government and the banks have agreed not to sell many of the bonds at first.

Instead, the banks will go to the ECB and look for loans. "The ECB requires that a bank have eligible collateral to secure its loans. Dodgy developer loans are not on the ECB's list of eligible collateral; government bonds are," Whelan said.

Nama will enable the banks access to a new source of liquid funds (it appears they are either at or close to their limit in terms of eligible collateral).

Contrary to what is commonly stated, the ECB will not be buying these bonds -- they are forbidden from buying government bonds of member states. They are only requiring that the bonds be available as eligible collateral.

But for how long will this process of large-scale ECB collateralised borrowing go on? Even before the banks receive the Nama bonds, they have become highly dependent on the ECB since the beginning of the crash.

Last Thursday, we saw the ECB beginning to close the unlimited liquidity operations.

It is now going back to the usual practice of issuing a fixed amount of liquidity, rationing it off via an auction.

This time last year, at the height of the crisis, the cost to Ireland for borrowing money was among the highest in Europe but that has since reduced on foot of international confidence following the announcement of Nama and last December's tough budget.

Sunday Independent

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