Government must change flawed Nama strategy

 

OPINION:The Government is not telling the truth about the costs involved with the asset agency – and is not following well-established procedures for dealing with problem banks, writes KARL WHELAN

AMID THE intense focus on stories of public money being wasted by John O’Donoghue and various Fás officials, it is easy to forget the potential cost to taxpayers of the proposed National Asset Management Agency (Nama). Nama plans to pay €51.3 billion in guaranteed government bonds for assets that it admits are now worth only €47 billion and which everyone knows are rapidly falling in value. To put this in context, €1 billion would keep John O’Donoghue travelling in the style he enjoyed as Minister for 10,000 years.

With so much public money at stake, one would expect the Government to explain in a sober and serious fashion why bank shareholders should receive this deliberate overpayment from the taxpayer. Instead, we have been subjected to a spin campaign based on the slogan the “only game in town” and a series of misleading talking points.

Much of this spin has been blatant misrepresentation of how Nama will work. Ministers have repeatedly stated the money to pay for Nama comes from “Europe”. This is false. Nama will pay for its assets with bonds that are obligations on the Irish taxpayer.

These bonds can be used by banks as collateral for loans from the European Central Bank, but repeated statements from Ministers that the Government has negotiated “a great deal” with the ECB or that Nama is a special “ECB-backed programme” or that the ECB has set the interest rate on the Nama bonds, are not correct. The fact is the ECB has not altered its normal rules about lending to banks by one iota to accommodate Nama.

Even when Government spokesmen admit that payment for Nama’s assets is in the form of Irish government bonds, its significance is repeatedly downplayed. A common talking point is that “Nama costs nothing”. Rather, we are just “issuing IOUs”.

Apparently, issuing €54 billion in IOUs in return for property assets of dubious value should not be a source for concern, even when we are already issuing hundreds of millions in IOUs per week to finance our budget deficit.

In reality, the bonds issued by Nama will be a huge addition to the stock of debt (IOUs) that must be paid back by the Irish taxpayer, a stock that is already rising so rapidly that there are serious international concerns about its sustainability, with very real consequences in the form of expenditure cuts and tax hikes.

What about expert support for the Government’s approach? Domestically, the Nama proposals have been criticised as a bad deal for the Irish taxpayer by a range of independent academic economists. In contrast, the only professional economists to publish articles in favour of the Government’s proposed approach have either worked for financial institutions or for the Government.

The International Monetary Fund says Irish bank loan losses will be about €35 billion and this implies that Nama should be used with nationalisation, contradicting the Government’s stance. The ECB recently recommended that prices for asset purchases from banks should be “mostly risk-based and determined by market conditions”, in contrast to the Government’s approach of deliberately paying more than market values.

Despite these disagreements, the public is consistently told that these organisations support the Government’s approach.

Another talking point has been that the Government’s plan will get credit flowing again. This assumes that banks that overstretched themselves lending to property developers will suddenly turn around and take the money they have obtained for these loans from Nama and lend it straight out again.

However, with credit quality of businesses and households deteriorating and banks needing to prepare for further losses, it is highly unlikely that much of the Nama funds will be reinvested in the Irish economy.

In relation to Nama’s semi-official slogan, “the only game in town”, its apparent premise is that there is no alternative to the Nama plan as constituted. This attitude reflects a dangerous combination of arrogance and ignorance.

The idea that the only possible way to deal with banks in difficulty is to overpay them for their assets is, frankly, ridiculous.

Around the world, there are a series of well-established procedures for dealing with problem banks and none of them looks like the Government’s current Nama proposals.

Banks that are insolvent can be liquidated, or taken over by other banks (with governments making up the shortfall) or nationalised. Banks that are undercapitalised are required to get outside equity investment from private investors or the government.

Asset management agencies have been used elsewhere to allow banks to get impaired assets off their balance sheets and move on with their core businesses. However, where this method has been used to minimise losses to taxpayers, it has involved buying assets at realistic low prices rather than Nama’s “best of all possible worlds” approach to pricing.

Brian Lenihan has argued that there is no point in considering a scenario in which property prices continue to fall because in that case, apparently, we’ll all be bankrupt. This argument ignores the future competitive benefits of cheaper housing and lower rents for businesses and appears based more on a lack of willingness to consider “appalling vistas” than on concrete economic analysis.

With the Government guaranteeing almost all debts of the Irish banks and with AIB in particular appearing to be insolvent without Nama’s overpayment, there is a strong case for temporary nationalisation of at least one bank and a combination of tailored restructuring measures for the others. Any temporary nationalisation could be combined with a search for new private investors and new management.

Unfortunately, in parallel with its pro-Nama spin, the Government has engaged in a sequence of anti-nationalisation arguments that are as honest as their claims about free money from Europe.

One way or another, the State guarantee obligates the Government to get our banks recapitalised and the fact remains that any plan that starts out by deliberately overpaying for assets cannot, by definition, be the cheapest solution for the taxpayer.

Other scaremongering comments ignore the fact that a number of troubled financial institutions around the world have been nationalised without unleashing the plagues of frogs and locusts suggested by the Minister for Finance and his stockbroker supporters.

It is noteworthy that in the US, the Troubled Assets Relief Program, which had originally been based, like Nama, on the idea of overpaying for bad assets, was altered to be a programme of equity investments by the US government.

These investments now look likely to provide a return to the US taxpayer. Despite what the Government tells us about Nama, it is not too late to adapt the legislation to reflect a similar change of strategy here.

Karl Whelan is professor of economics at University College Dublin

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