Courts' views on a recovery in the property sector expose Nama's risky pricing strategy

 

NAMA OUTLOOK:The implications of the Zoe judgment are very serious for taxpayers and the Government, writes ARTHUR BEESLEY

THE FORCE of the Supreme Court and High Court rulings that rejected Liam Carroll’s bid for an examinership of the Zoe group points to overbearing pressure on the development sector. They also raise glaring questions about the risky pricing system proposed for Nama, the National Asset Management Agency.

If Carroll exemplified in many ways the unbridled, opportunistic confidence that spurred the property boom, it speaks volumes that he was unable in successive court hearings to present anything approaching a compelling argument that his insolvent companies had a reasonable prospect of survival. Faced with an immediate threat of insolvency proceedings, he didn’t even present a business plan to the Supreme Court.

Consider that in the context of the acute fiscal troubles of his fellow developers Paddy Kelly, John Fleming and Hugh O’Regan, and it is difficult to shirk the conclusion that the current market stasis will bring a great many more of them into the maw of public insolvency.

Many in the developer class, doyens of the boom, now face wipe-out at the hands of Nama, which will have a mandate to place “hopelessly insolvent” defaulters into liquidation.

While Minister for Finance Brian Lenihan has said that one of the new agency’s most difficult tasks will be to distinguish between borrowers who have some prospect of a return to viability and those who have not, recent data presents little ground for any optimism.

When Carroll was before the High Court last month, it emerged that he has sold but 39 residential units since last December.

This seems typical of a market in which, according to AIB, 16,000 unsold apartments stand vacant in Dublin alone.

For banks, it follows that losses mount by the day. At Anglo Irish Bank, for example, accounts signed off last September pointed to €2.5 billion in “past due” and impaired loans. By March, following nationalisation, the figure had risen to €23.6 billion.

In the State-backed AIB, meanwhile, the level of criticised loans rose to €33.4 billion in June from €15.5 billion in December. It is a given that the largest concentration here is in AIB’s troubled property and construction portfolio.

The situation for other Irish and non-Irish lenders is no different. Up to 1,000 development borrowers have loans in excess of €10 million from institutions guaranteed by the State; roughly 10 of them have loans of more than €500 million; and some are indebted by more than €1 billion.

It falls to taxpayers, as guarantors and as providers of capital, to bear upfront the cost of any losses on those loans.

The implication of the Supreme Court ruling on Zoe by Chief Justice John Murray, which upheld Mr Justice Kelly’s High Court ruling, is that the courts have heard nothing to suggest a recovery is visible.

The ruling said there was a complete absence of any objective evidence or material from Carroll, leaving aside an accountant’s report, which could lead to the conclusion that there was “some underlying objective rationale” to support his contention that market conditions would change in the short to medium term.

No less than any other protagonist in the property meltdown, Carroll can’t defy the laws of gravity.

In respect of Nama, this questions why the public should be expected to take on trust a pricing mechanism that would see the State pay a premium in excess of current market values to reflect estimates of the “long-term economic value” of an asset.

As a result of its ardent desire to avoid any more bank nationalisations, the Government wants taxpayers to place their faith and tens of billions of euro to pay over the odds for assets whose value has collapsed and for which there is no market. A big ask indeed, given all we now know.

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