Q&A with Dan White
What is NAMA?
NAMA, the National Asset Management Agency, is basically a financial dustbin. It will purchase the banks' bad property-based loans, and the properties which have been pledged as security against those loans, at discount. The Government hopes that by removing these bad loans from the banks' balance sheets it will get them lending again.
How much will it cost?
Brian Lenihan announced last September that NAMA would pay €54bn for loans with a book value of €77bn. That's an average 30pc discount. Now the word is NAMA will be buying loans with a book value of up to €80bn. No matter how one does the numbers, NAMA will spend €50bn or thereabouts buying the banks' bad loans.
Who is paying for it?
The Government is skint and doesn't have the €50bn. Instead it proposes issuing the banks with special bonds for their bad loans. It hopes that the banks will then take these bonds to the ECB which will in turn convert them into cash. The ECB will eventually expect the Irish Government to repay them.
How long will NAMA take to sort out the banking system?
At least 10 years.
Will it work?
We don't know. The Government is gambling that property prices will recover at some stage over the next 10 years. This would allow NAMA to sell the properties it now owns for at least the price it paid for those loans. However, for NAMA to work Irish property prices will have to recover to close to pre-crash levels.
What could go wrong?
The biggest danger facing NAMA is that it overpays for the banks' bad loans and the taxpayer is left holding the baby when it eventually sells the properties, which have been pledged against the bad loans it has bought from the banks, at a loss. This would massively push up the cost to the taxpayer.
Is there any guarantee that NAMA will encourage the banks to lend?
None whatsoever. This is almost certainly the weakest link in the entire NAMA chain. Not alone is the Government assuming that the banks will be willing to lend more money to credit-worth borrowers, it also seems to believe that, there are thousands of individuals and businesses out there who want to borrow rather than save money.
Why is the state increasing its shareholdings in most banks?
In recent months NAMA and the Financial Regulator have been going through the Irish banks' loan books with a fine-tooth comb. They have been examining all of the banks' loans, home loans, personal loans, business loans, credit cards etc, and not just their loans to builders and property developers. These examinations have shown that the banks have far more bad loans than just their property-related lending and that they will need to raise extra capital.
How much more capital?
That depends on who you talk to, but the latest estimates are that the Irish banks need up to €22bn of fresh capital. Banking analysts estimate that the banks will be able to raise about €6bn of this from the private sector through a combination of asset sales and new share issues but that the balance, about €16bn, will have to come from the state.
Where on earth is the exchequer going to get its hands on €16bn?
When it pumped €11bn into the banks last year, the Government raided the National Pensions Reserve Fund. That option isn't available this time meaning the Government will have to borrow the money on the international bond markets. In other words, we are putting future generations of taxpayers in hock to keep the banks in business today.
Will NAMA stop the banks from increasing interest rates?
Almost certainly not. In fact the opposite is almost certainly true. The Irish-owned banks are itching to increase the interest rates. AIB announced yesterday that it was putting up its mortgage rates. Expect most of the other banks covered by NAMA to do likewise.
What is the best thing that taxpayers and bank customers can do?
Pray to God that the thing works!