Lenihan must demonstrate independence from advisers and accept Nama amendments


A willingness to engage with the Opposition on the legislation will make it more palatable to all

THREE WEEKS ago I said in this column that a parliamentary defeat either of the Nama Bill, or of a December budget implementing the first stage of the fiscal recovery programme announced in the April budget, could have a negative impact upon our capacity to borrow the funds needed to keep our economy afloat.

I added that, for this very reason, a Government defeat on Nama would not be to the advantage of the Opposition parties, who would be better placed if they came to power after both this issue and the December budget had been dealt with by the present Government.

But, contrary to what has since been alleged, I refused to get involved in politically sensitive comparisons of the relative merits of different schemes, each of which may have its own merits.

This week the Dáil debate on the second stage of the Nama Bill has provided the Opposition parties with an opportunity to argue the merits of their respective solutions – as against the Government’s Nama Bill. But after the Dáil vote on this issue in early October – delayed until then for the benefit of the Green Party – the politicians will move on (with a sign of relief all around, I suspect!) to the constructive task of seeking to improve the provisions of the Nama Bill, as drafted by the Government.

The Minister for Finance has stated that he will be open to amendments in the course of the committee-stage debate starting on October 6th.

In particular, he has expressed a willingness to consider proposals that would make it possible to drop the role allocated to him in sections 13 and 14 of the Bill, that of issuing guidelines and directions to Nama. That would clearly be a welcome modification of what is currently contained in these sections of the Bill.

It is worth pointing out that, on August 25th, Richard Bruton wrote to Brian Lenihan, not just to outline Fine Gael’s alternative to Nama but also to set out a series of nine constructive proposals for changes to the Government’s draft Bill – a creditable initiative that for some reason has received no publicity.

Labour is also preparing a series of amendments to the Government’s Bill. Clearly, therefore, the Minister’s declared willingness to accept amendments will be fully tested.

Now, experience has shown that Ministers’ advisers tend to be very strongly committed to the proposals in the legislation that they have drafted. It will be especially important in this instance that the Minister demonstrates willingness to assert his independence of his advisers by accepting Opposition amendments, even where these are not merely technical but may involve a shift from his department’s approach to the problem. In that way wider public support can be mobilised and the working of these new arrangements made more generally acceptable.

The Bill as presented to the Dáil includes a watered-down version of Prof Patrick Honohan’s suggestion for part-deferment of Nama payments to the banks. It would be useful to hear during the committee-stage debate why the actual proposal made by the incoming governor of the Central Bank before his appointment was not adopted by the Government.

The Minister has also made it clear that he intends to consult the Opposition about the appointment of the chairman and board of Nama. It will not be easy to find suitable people with the necessary skills and experience to fill these positions – as well as to man the boards of the banks during the proposed two-year phase-out of the existing bank directors.

The Minister’s second-stage presentation of the case for the Bill and the supplementary documentation accompanying his speech has provided a clearer – and marginally less alarming – picture of the scale of our banking crisis.

Thus, what is described as being “assets’ value at origination” are now estimated at €88 billion – as against an earlier suggested figure of €120 billion. This principally reflects the decision to leave the banks to deal with those who borrowed less than loans of €5 million. Their present value (after a decline of 47 per cent) is – incidentally! – €47 billion, and Nama is to pay the banks €54 billion in respect of them.

Only €2.7 billion of this will be by way of subordinated loans, from which the banks will benefit only if an estimated 15 per cent value increase actually takes place. That €2.7 billion subordinated loan figure appears small; and it would have been higher if Prof Honohan’s proposal had been accepted – a point that might be pressed in the committee-stage debate.

However, a point from which some

comfort may be taken is the fact that one-third of these loans are in respect of assets outside the State, mainly in Britain, where values have of course fallen less

sharply than here – and where the market is already recovering.

And about €40 billion of the assets are interest-bearing, which will fund the 1.5 per cent interest payments.

The Irish market situation, involving the remaining two-thirds of the loan book, is

more complex. In one very small section of the market – the Dublin prime commercial investment property sector – a shortage of properties seems already to have started, and some recovery is expected to emerge within six months.

That could be a harbinger of more general recovery in demand at a later stage – although it would take time for this to translate into any increase in value.

In the main cities – Dublin, Cork, Limerick and Galway, which probably account for one half of the number (but more than one-half of the volume of loans) – supply and demand for residential property are already coming back into balance, although several years may elapse before this could translate into any hardening of prices.

By contrast, in most of the rest of the country there is a much smaller prospect of any recovery in the short and medium term. Many housing estates are likely to remain unsaleable, and much development land will revert to agricultural value.

Bringing all this together, it seems to me that we are near or even at the bottom of the market in some locations and, although there can be no certainty about the future, and one cannot rule out a further crisis happening in Britain, the balance of probability now

favours an eventual modest recovery in average property prices in the domestic market that would justify the Minister’s Nama projections.