Adviser criticises Nama 'guess'

Wed, Aug 26, 2009, 01:00

A special economic adviser to Minster for Finance Brian Lenihan has said a call by 46 economists for the National Asset Management (Nama) project to be reconsidered was based on a "careless use of numbers".

Economist Alan Ahearne said a claim by 46 economists that the Government will pay significantly above market value for the bad loans advanced by the banks and would end up buying loans with a true value of €30 billion was a "terrible estimate, [a] guess".

"The problem I have with the article is that it comes up with this valuation for the loans. They have put a value on what they think the loans are worth, of €30 billion."

Before any estimate can be made valuers need to know where the property on which the loan was secured was located, the original purchase price, the extent of borrower equity and the ability of the borrower to make repayments.

Dr Ahearne said Nama must, following EU guidelines, value each loan separately. "The idea that someone sitting in an Ivory tower with no information can come up with a number is ludicrous."

He said loans worth €90 billion - the amount of loans Nama is expected take on - would have purchased property worth €120 billion. Even assuming a 50 per cent fall in property values since the peak of the market would bring the value of the loans to €60, rather than the €30 billion suggested in the article, he said on RTÉ's Morning Ireland.

Agencies such as the IMF and other had estimated overall losses to the Irish banking system over three years of €35 billion, rather than the €60 billion suggested in the article.

"The amount of money paid for these loans will not assume, as it says in the article, optimistic assumptions for property prices.

"I can assure you what is going to be used is not optimistic about property prices."

He said in rural areas many sites would only have a use as for farm land and in such cases agricultural land prices would be paid for the property.

Dr Ahearne said Nama would "wash its face every year" and that the amount of interest coming in each year would be about the same as the amount of interest being paid out.

The issue, he said, was whether Nama could repay all of its loans in ten years or so when it was shut down and Dr Ahearne said it "absolutely" would.

"The analysis all shows this thing [Nama] can break even or even make a profit."

Dr Ahearne was responding to a signed an article in today's Irish Timesby a group of 46 economists calling on the Government to reconsider the National Asset Management (Nama) project.

They argue that Nama should pay the banks only the current market value for the loans it will assume.

Prof Lucey said he had contacted about 250 lecturers in economics and not one had come back to say they disagreed with the views expressed in his draft. He said a number did not sign because they did not want to get involved in a round-robin exercise.

In the article, the economists say the Government will pay significantly above market value for the bad loans advanced by the banks.

"The key difficulty facing the Government is that to pay prices now prevailing would leave the banks sitting on losses sufficiently large as to effectively bankrupt them, which would then require the State to invest capital sufficiently large as to in effect nationalise the banks," the economists argue.

"It is thus clear that the Government are determined to pay a price for land and speculative developments greatly in excess of the market clearing price."

The economists say that by overpaying, the State would wind up transferring to private individuals a sum close to exchequer's entire annual tax-take.

The economists went on to urge the Government to reconsider its approach to payment for loans to be taken into Nama and to pay no more than current market value, which they said could be ascertained even in these straitened times.

The article suggests that bank shareholders should forfeit their investment. Bondholders should also be asked

In his e-mail to fellow academics asking them to sign the article, Prof Lucey pointed to the impact of an earlier article on the issue signed by 20 economists.

"The 20 economists piece in The Irish Timeshas been constantly referenced in the debate, so we as a group do have influence. How much more influence on the debate might we have if we had 200 signatories."

Mr Ahearne was one of the economists contacted, but he responded by sending an e-mail to colleagues taking issue with what he described as "some of the deficiencies in the note you have been asked to sign".

The Cabinet expected to be briefed on Nama today by Mr Lenihan.