Thursday, September 10, 2009

Economics 10/09/2009: Greens' 'proposal' might lead to lingering capital problems post-Nama

Oliver Gilvarry of Dolmen - a clear supporter of Nama As Is proposal in today's note: "The tax will be 80% of the profits gained from the increase in land value following a re-zoning decision. The impact of risk sharing in NAMA will be to reduce the liquidity generated by the banks on the sale of loans to NAMA. It could also reduce the capital relief banks will experience from the transfer of loans as a certain amount of capital may have to be put aside for the subordinated NAMA bonds they will receive unlike the other NAMA bonds."

This is exactly the point I made yesterday (here). The Greens' helping hand can just as well cost the taxpayers when the banks come begging to Leni again... post-Nama.

And this bring us to Mr Cowen's performance on today's Prime Time. Hmmm - the Gods gotta be laughing somewhere in ancient Rome's temples. Mr Cowen now wants to bring living standards back to 2007 peak levels by taxing us to death, issuing more debt against our future incomes than was ever issued in this country history before, spending like a drunken sailor, not reforming public sector pay and pensions, running vast deficits and... hold your breath... restoring credit and liquidity flows with a Nama-style undertaking?

You can almost see this working in theory, can't you.

You can't? Well, to be honest neither can I. Here is why, quickly:

Nama is about working out bad loans written against bad assets. It is, therefore, an investment undertaking with a life-span of decades. Liquidity provision is a short-term undertaking aiming to increase money supply in the economy that is free to move across the economy.

Nama bonds will not provide such a 'liquidity event' for three reasons:
  1. As an investment undertaking Nama will need credit of its own to work through the loans and underlying assets, so to assume that banks will simply lend-out the €60bn pot of cash they will get from Nama automatically assumes that the cost of working out Nama loans will be financed through some other sources. Is Brian Cowen actually envisioning another issue of debt to finance this undertaking?
  2. As an undertaking to repair balance sheets of the banks, Nama will fund capital base, not lending funds on banks books. In other words, for banks with an average 173% loans to deposits ratio, any cash they can get will have to be locked in a vault. Nama funds cannot be disbursed in new loans.
  3. The Greens have just shaved off a large chunk of the 'liquidity' pool through their 'risk sharing' gizmo.
Now, Taoiseach has clearly told the nation when he claimed that Nama is based on 'international advice' and 'best advice available'. Given that the side critical of Nama includes virtually all leading Irish economics and finance specialists from academia and a handful of foreign academics, including at least 3 Nobel Prize winners, plus Swedish politicians responsible for their 'bad bank' work-out, I fail to see how can the 'best advice available' actually completely exclude the truly best advice made available to the Government.

Finally, Cowen refused to step in to offer even a momentary protection to ordinary households when he was asked if mortgage defaulters will be protected. Mr Cowen has made it now record-clear that his Government is unconcerned about consumers, taxpayers and ordinary entrepreneurs. It is banks who must be rescued.

The more they (Leni, Ahearne, Cowen - oh, and why not call Mary Coughlan out of her retirement to pedal Nama-cakes too) dig, the deeper is the hole... after all they did dig Brian Cowen out of his hole where he resided for some 5 months post April Budget and back into the RTE studios - twice within the span of 5 days last...
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