Economics 06/02/2010: Nama stalling at the EU doorsteps

For those of you who missed my Thursday musings on Nama in the Irish Daily Mail, here is an unedited version of that article:

Two friends from the distant land of global finance have caught up with me the other day. ‘What’s going on with your Nama?’ they demanded to know.

Their concerns were about the latest hiatus created around our Bank Rescue scheme.

Yesterday’s news that NTMA is to take over management of the Exchequer affairs relating to bank shares bought with taxpayers’ cash is the case in point. Apparently, NTMA – the parent institution to Nama – will hold talks on capital needs with the banks as well as engage in their realignment or restructuring. It will also advise on banking matters, and crisis prevention, management and resolution. Just exactly can this task be achieved without creating a severe conflict of interest between NTMA and Nama, or without stepping on the heels of the Central Bank and Financial Regulator is anybody’s guess. But the bigger problem here is whether such a role for NTMA will constitute an undue interference in the financial markets for banks shares.

This activist approach to managing Nama news is not new, however. Following the quiet publication of the last piece of legislative jigsaw, Nama (Designation of Eligible Bank Assets) Regulations 2009, on the day before Christmas Eve, our Government has gone into an overdrive, trying to spin Nama as a panacea for all economic ills of the country.

Nama was painted as a socially responsible undertaking that will be reporting to the Government ministers on the issues of ‘social dividend’. It will provide housing for the poor and will take off the market vast surpluses of unwanted properties. Nama will also deliver a healthy dividend by charging local authorities for this ‘service’. But the local authorities will still somehow come on top by saving money.

Perhaps mindful of having produced too much gibberish of the above variety, our public representatives have started talking up the discounts that Nama will apply on loans it buys from the banks. Just 6 months or so ago Nama enthusiasts were saying that a 12-20 percent average discount will reflect the ‘true long term economic value’ of the loans? Now we are into 30-35 percent haircuts and rising.

The iron logic of finance tells us that the greater the discount Nama imposes the greater proportion of the original loan will have to be written down by the banks as a loss. This will require fresh capital, of which the taxpayers are the only source for no investor will be willing to buy new shares in Irish banks voluntarily.

By my estimates from some 9 months ago, the Irish banks will require Euro 10-13 billion of fresh capital the minute Nama goes through their books. After months of ignoring this prediction, the Government now admits as much.

But wait, as the discounts estimates increase, so are the concerns in Brussels and Frankfurt about Irish Government’s plan. First, the ECB is now seriously worried about the quality of Irish banks collateral deposited in its vaults. Second, the EU Commission is more concerned that approving Nama will produce poor optics internationally, as Nama will be openly buying trash with taxpayers cash and Europe’s approval.

As if these two issues were not enough, we now have two official versions of financial theory – the Frank Fahey’s Proposition and an Alan Ahearne’s Theorem.

The former claims that ECB is giving us a free lunch – a deeply discomforting statement from ECB’s point of view as it undermines the bank’s credibility.

The latter states that the banks, repaired by Nama, will “stimulate demand” for consumer loans. So our economic policy is being shaped by people who think that the banks can drive up demand for credit in the economy stuck in negative equity, with consumers facing higher taxes and falling incomes. And, of course, there is an added concern about the ordinary homeowners and their bad debts. As the Government is preparing to create another massively risky scheme for ‘helping’ defaulting mortgage holders, the Commission is starting to think – was Nama a limited undertaking, or will Irish banking crisis spill over into a general economic crisis as well.

Then there is an ongoing saga with loans. Back in the days before Nama Bill was passed, we were told that the Government has an excellent idea as to what security they can get on Nama-bound loans. It turns out they hadn’t a clue. As Namacrats are discovering, the loans held by the Irish banks often have a secondary claim to the underlying assets. And, they are finding that the poorer the loan the lower, usually, is the underlying security.

Suppose the bank has a loan for Euro 10 million secured against the property worth Euro 5 million. Suppose Nama buys the loan for the face value of the underlying property, implying a haircut of 50%. But if loan seniority is secondary in seniority, given the recent cases of our top builders going through the insolvency courts, the post-default value of the asset is somewhere between half a million and nil. Subtract the legal costs of fighting the borrower and better-secured lenders in the courts. The state will be lucky to get a euro from the deal.

This arithmetic is not escaping the ECB. Since December, we are painfully aware of Frankfurt’s intentions to close the discount window through which Irish banks have already pumped some Euro 98 billion worth of junk-rated assets in exchange for cash. By all Euro area standards, Ireland – a minnow accounting for roughly 1.8 percent of the entire common currency economy – has swallowed about 19% of all cash released by the ECB since the beginning of the crisis. More than any other country in absolute terms. Add to that the prospect of Euro 59 billion worth of Nama bonds, plus another Euro 10-12 billion for banks recapitalization, Irish banking system bailout can cost ECB up to Euro 170 billion in loans secured against, you’ve guessed it – unfinished estates in the middle of nowhere.

So understandably, the ECB folks are worried. By May they will start reversing junk securities they loaned against out of their vaults and back into the banks. Should they succeed, Irish taxpayers will be stuck for more cash to plug the new hole in banks balancesheets.

Which in turn will drive the quality of our collateral even lower. Mortgage rates will climb by 100-150 basis points for those of us who are still paying them down. Cost of credit for businesses will rise well into double-digit figures. Credit cards, car loans, consumer loans – all will become as rare in Ireland as polar bears in Sahara. Taxes and charges will increase – by 15-20 percent on average over 2011-2013. Instead of banks stimulating demand for credit, as Alan Ahearne suggests, Ireland Inc will be back on the slippery slope toward deeper recession.

Ultimately, it is the prospect of Ireland sliding back to rival Greece as the drag on the Euro that has been bothering my friends, as well as the ECB and the EU Commission. Sadly, their concerns are our last line of defense against Nama.

Economics 22/09/2009: Two further Nama points

Updated below:

Global Finance Magazine on the concept of ‘long-term economic value’ of distressed assets (here) and on effectiveness of bad assets purchasing schemes:

“Meanwhile, the passage of the Troubled Asset Relief Program (TARP) into law in the United States failed to alleviate strains in the financial markets...

The TARP empowers the US Treasury to buy troubled assets at heavily discounted prices, well below their long-term economic value. “No one yet knows what price will be paid for the toxic paper, or what the default rates will be on the underlying mortgages,” said Carl Weinberg, chief economist at High Frequency Economics. “

Over time, people will realize that all the underlying mortgages are not defaulting, and panicky market conditions should abate, according to Weinberg. “We have seen this game before,” he says. “In the 1980s highly indebted economies like Mexico, Brazil, the Philippines and Argentina bought back their own debt from panicked small banks at 20 cents on the dollar.”

20 cents on the Dollar, folks? Nama is buying defaulting developers loans (not sovereign bonds) at 79 cents of the Euro!!! I’d rather have Brazil’s and Argentina’s bonds, thank you very much.


Another interesting bit:

Robert Boyer’s paper “Assessing the impact of fair value upon financial crises” published in the Socio-Economic Review, 2007 deals with the expected effects of LTEV application to accounting standards, but the implications of this are pretty much the same for pricing (as in Nama). Boyer concludes that LTEV “gives at each instant a seemingly relevant liquidation value, but obscures the value creation process by mixing present profit with unrealized capital gains and losses. This discrepancy increases with an increased degree of uncertainty, which is at odds with widely held beliefs about the efficiency of existing financial markets. Fair value introduces an accounting accelerator on top of the already present and typical financial accelerator. …If fair value accounting is applied to banks, an extra volatility may be created...” What is this about? Three things, as far as Nama is concerned:

1. LTEV will simply translate future value (capital gains) on assets underlying Nama-purchased loans into monetisable value as if all future price appreciation expected under LTEV can be captured in full. This, of course is a matter of timing (knowing when to sell) and efficiency of sales (having zero cost of selling and no impact on selling price of the volumes of sales that Nama will have to undertake);
2. LTEV neglects to price in the effect of large asset holdings off the market (Nama holding vast portfolio of property-backed loans off the property market), which is likely to depress property prices over the life-time of Nama itself. The end result here – a gross overestimate of future expected prices.
3. As the two points above coincide in timing, they act to reinforce each other – an accounting accelerator occurs.
   

Who says you overpay only once?

Here is the rate at which the Government can currently borrow on a 6-months basis:
Let me explain:

• we can borrow in the form of ordinary bonds at 0.481% for 6 months period. These are convertible at repo window of ECB at a discount of 12% on face value and 1% interest rate. Total cost of injecting €1 into bank balance sheet is, thus, 15.2 cents; or
• we can issue Nama bonds at 1.5% with 5% in subordinated bonds, with banks taking these to the ECB repo window at 12% and 16% discounts respectively, borrowing at 1% against both. Total cost of injecting €1 into bank balance sheet is, thus, 16.4-18.1 cents depending on how ECB risk-weights subordinated bonds.

Cheap money in the Frank Fahey World of Stupid Economics?

Economics 12/09/2009: More NAMA lies exposed

One interesting observation on Nama and a quick follow up to the developing story on ECB alleged unwillingness to deal with nationalized banks.

We, on the critics of Nama side, have expended much gunpowder arguing that there is a natural, legally binding order of rights contained in each asset class held by investors in and lenders to the banks. This order requires that first to take the hit in any balance sheet adjustment will be the shareholders. Then the subordinated debt holders and lastly the secured debt holders. This argument is used by myself and others to show that taxpayer must be last in the firing line - after all of the above take their dose of bitter medicine.

Yet in all of this excitement we forgot the humble contractors. Now, many of the loans Nama will buy into will be written against properties on which some work has been performed in the recent past, or is even ongoing today. The problem is, our heroic developers in many cases have not paid their bills to the contractors providing this work. As far as I can understand, these unpaid contractors are the holders of the priority right on repayment in the case of liquidation of the development firm - ahead of the bank holding lien on the property.

Of course, Nama can go and tell the larger contractors that, look guys, you forget your claims on work done, write it off as a loss on your taxes and we will look after you when time comes to finish the properties. Smaller contractors will be simply told to get lost - suing the state (Nama) is a very expensive business for them. This is dandy in the banana republic we live in. But estimated (rumored) 30% of the properties Nama will claim under loans purchases will be outside this state - in countries like the USA, UK, France, Germany, Bulgaria, Romania. Nama has no sway there and their courts are not going to toe Brian Lenihan's line of National Interest. So in these countries, the unpaid or underpaid contractors can seize the properties ahead of Nama, leaving Nama with loans devoid of collateral.

This should be fun to watch as our legal eagles from Nama fly over to, say,

• Newcastle to fight the UK system that treats people supplying work as real corporate citizens with real rights; or
• Plovdiv to fight Bulgarian courts, where a leather-jacketed Petar would have to explain to them that if you owe money to his cousin, you either should leave now and forget about that unfinished apartment complex 'with amazing views of the local dump' or risk never seeing your own little 4-bed in Howth ever again.

Have our Brian Twins thought of that little pesky complication?

Now to the issue of ECB. Several of us - again from the Nama critics or sceptics - have done some digging on the issue. What my colleagues now firmly claim is that per their sources, there is a mandate on the ECB to actually treat publicly owned banks in exactly the same way as privately held banks so as not privilege the former over the latter.

Here is what I have found:

Per ECB own research paper The European Central Bank: History, Role and Functions written by Hanspeter K Scheller (link to it here) (Second revised edition, 2006), Annex I provides excerpts from the Treaty Establishing the European Community, Part 3 Community Policies, Title VII: Economic and monetary policy, Chapter 1 "Economic Policy":
"Article 101
1. Overdraft facilities or any other type of credit facility with the ECB or with the central banks of the Member States (hereinafter referred to as ‘national central banks’) in favour of Community institutions or bodies, central governments, regional, local or other public authorities, other bodies governed by public law, or public undertakings of Member States shall be prohibited, as shall the purchase directly from them by the ECB or national central banks of debt instruments.
2. Paragraph 1 shall not apply to publicly owned credit institutions which, in the context of the supply of reserves by central banks, shall be given the same treatment by national central banks and the ECB as private credit institutions."

Emphasis is mine. This clearly states that the pro-Nama supporters are simply wrong in claiming that the ECB will treat nationalized banks or Trust-owned banks any different from the privately held banks.

Further quoting from the same ECB publication:
"Article 21 Operations with public entities
21.1. In accordance with Article 101 of this Treaty, overdrafts or any other type of credit facility with the ECB or with the national central banks in favour of Community institutions or bodies, central governments, regional, local or other public authorities, other bodies governed by public law, or public undertakings of Member States shall be prohibited, as shall the purchase directly from them by the ECB or national central banks of debt instruments.
21.2. The ECB and national central banks may act as fiscal agents for the entities referred to in Article 21.1.
21.3. The provisions of this Article shall not apply to publicly owned credit institutions which, in the context of the supply of reserves by central banks, shall be given the same treatment by national central banks and the ECB as private credit institutions."

So the same stands. Now, last year, the ECB issued clarification on Article 101 prohibitions of financing (here) which actually stresses that this prohibition (restricting Central Banks from providing ‘overdraft facilities or any other type of credit facilities with the ECB or with the central banks of the Member States … in favour of …public authorities, other bodies governed by public law, or public undertakings' and Article 21.1 of the ECB Statute that mirrors this provision):

• also applies to any financing of the public sector’s obligations vis-à-vis third parties (so technically, either Nama as a state-own undertaking cannot borrow in the future from the ECB via debt issuance of its own - which will imply that Nama own bonds will have to be priced for sale in private markets only, implying horrific cost to the taxpayers of financing Nama work-out, or nationalized banks will have exactly the same access to the ECB lending in the future as Nama will) and
• crucially, that in dealing with publicly owned credit institutions there is no restriction of Article 1 under the ECB statues.
  

In fact, the legal opinion clearly states that Article 1 is designed to restrict National Central Banks' and ECB being used to finance 'public sector' - i.e to raise funds for the Exchequer, not for the credit institution operations.

Here is another interesting factoid. Chart below clearly shows that many European countries operate state owned banks. In Germany, for example the market share of state-owned banks is in excess of 40%.Source: http://ssrn.com/abstract=1360698

Are pro-Nama advocates saying that these banks have no access to ECB's discount window as well? Or will ECB treat them somehow differently from the nationalized Irish banks? If the latter is true, should this be kept hidden from the Lisbon Treaty debate? (Now, personally, I do not believe Irish banks, if nationalized, will have any trouble in raising funding either via ECB or via private markets, so the above question is a rhetorical one).

Now, logic of Article 1 as stated above, actually suggests that the ECB will have harder time allowing Nama - a state-owned non-credit institution explicitly prohibited from obtaining financing from the ECB - to swap its own bonds for ECB's cash than it would allow state-owned bank - a credit institution explicitly allowed to obtain such funding from ECB - to do so. ECB's own paper and legal opinions are confirming, therefore that it is Nama, not the nationalized banks, that would have much harder time getting support from the ECB!

Economics 12/09/2009: ECB, repos and Nama

It has not became customary for the Government and public officials to provide 'expert commentary' on Nama that in effect attempts to deflect substantive criticism by making unarguable, non-falsifiable assertions on Nama that can neither be confirmed, nor rejected, yes sound plausibly informed.

The latest such 'argument' against Nama critics floated in political circles - opposition parties, FF backbenchers etc - is that, per DofF, ECB will not be willing to take repo bond off nationalized banks.

What does this mean? In the lingo of Nama-supporters, this means that if we nationalize banks (either via a direct nationalization or via equity purchases post-Nama), the nationalized banks will not be able to use Nama bonds (or any other repurchase agreements paper) to swap with ECB for cash. The threat then is that the nationalized banks will have no access to a liquidity window at ECB and will not be able to operate.

Is this a serious threat? If true, it is a serious concern, because in our 'confident' economy of Ireland Inc, a combination of severe recession and Brian Cowen's economic (taxation) policies have effectively assured that no deposit-based lending can take place, so our banks are now fully reliant for funding on ECB and interbank markets.

But is it true? This we do not know and we cannot know, for DofF will neither confirm of deny they are saying this. And furthermore, they will never actually show the ECB statement confirming or denying it.

So what can we conclude about this threat?

Two things, really:

1. The latest DofF threat is bogus in its nature, for there are plenty proposals out there for repairing Nama that do not involve nationalization. If ECB is willing to support privately held banks (as opposed to plcs) and since ECB's definition of a 'supported' bank does not have a limit on how large share of public ownership can be as long as the bank remain private to some extent, then my proposal for Nama 3.0 or Nama Trust will work just fine. The alleged DofF 'fear' is misplaced and it is being floated out there simply to deflect public attention away from viable alternatives to Nama.
   
2. The latest claim is also bogus in terms of its logic. Suppose the ECB refuses to swap repos coming through a nationalized bank from Ireland. Since nationalization covers the entire domestic banking sector in Ireland, the ECB then refuses to take any bonds from any of the Irish banks, making the entire system of Irish banking illiquid. Now, Ireland is a Eurozone country. This act by ECB will force at least one Eurozone country into a combined liquidity and solvency meltdown. What do you think will be the expected effect on the Euro? Oh, yes, it will overnight become a twin to the Zimbabwean currency. Will the ECB agree to destroy its own reputation, monetary system and currency only to avoid repurchase operations with a more stable and less risky (post-nationalization) banking system of its member state?

In short, the rumors that DofF is claiming that the ECB will not swap with nationalized banks are so out of line with reality, they either cannot be true, or someone in ECB is flying high as a kite. You judge which one of these two alternatives is a more plausible one.

Economics 02/09/2009: ECB legal eagles picking at the NAMA carcass

The ECB  legal opinion note on Nama provides some interesting reading.

Per ECB (§1.1) Nama is designed to “expeditiously deal with the assets acquired by it and protect or otherwise enhance the long-term economic value of those assets, in the interests of the Irish State”. Several things are going on here.

1. the ‘expeditious’ nature of Nama is referred to in Part 1 §2 (b) line (viii) of the draft bill and Part 2, Chapter 1, §10 (1)(b). However, §2 page 21 states: “
2. So far as possible, NAMA shall, expeditiously and consistently with the achievement of  the purposes specified in subsection (1), obtain the best achievable financial return for the State…” Has anyone spotted a slight contradiction? Assets will be disposed expeditiously, Nama will act expeditiously, but asset pricing will be based on long-term valuations. This is known as a maturity mismatch risk – the objectives are ‘expeditiously’ short-medium term, pricing is long-term.
3. As the ECB states, repeating Nama legislation language correctly, Nama will aim to guard the interest of the Irish state. Now, the State does not have the existent allocated means for such an undertaking, so to pay for Nama, it has to use taxpayers’ money in an emergency draw on resources. Since the Irish State is not spending on Nama the money that belongs to it, why should the State interests be protected by Nama and not those of the payee, i.e the taxpayer? Of course, the only way that Nama legislation makes sense from the point of view of protecting our property rights and liberty is if State interest = Taxpayer interest. This is, alas, not so. Irish State under the current Government has been run as a thiefdom of public sector unions and vested interest groups. This, of course, is not and should not be of concern to the ECB. But it should be of concern to ourselves, the taxpayers, and to the opposition.

Further per ECB §1.1: “As noted by the Minister, replacing property related loans with Irish Government bonds will strengthen the balance sheets of the banks”. So this is it, then, the ECB has clearly agreed that Nama bonds will not be off-balancesheet for the Exchequer, but will be ‘Government bonds’ and thus countable into the overall:

• Public debt;
• Future public bonds risk premia;
• Future demand for public bonds issued by the Irish Exchequer

Now, note that consistent with what minister Lenihan told the Oireachtas committee yesterday – something that the Government evaded saying out loud – the bonds will have to be ‘marketable’ in the open market, so their pricing cannot bear artificially low interest rates. This validates my (and other’s) earlier assumptions on long-term Irish bonds pricing for Nama at a coupon of 5-6%pa in 2021.

ECB §1.3 recognizes that Nama is planning to purchase a wide range of assets, including “any other class of assets” (other than loans and collateralized products). This, of course, opens Nama to political favouritism with the banks (in exchange for no layoffs and for not skinning their customers) and with the specific developers. It also, potentially, allows Nama to expand its mandate to cover mortgages and other loans. In the end, this little clause opens up a possibility to a wholesale redrawing of the already blurred boundaries between Irish businesses and the State.

The same paragraph in the ECB note also acknowledges that Nama will cover rolled up interest and re-financed products – a land mine when it comes to overall portfolio pricing and quality.

§1.10 states that “NAMA (or a NAMA group entity) may, with the  Minister’s  approval, borrow, with or without the Minister’s guarantee, such sums as it determines to be necessary for the performance of its functions (including debt securities borrowed from the Minister or NTMA and debt securities issued by NAMA or a NAMA group entity to provide consideration for the acquisition of bank assets).” What does it mean? Well, the first part (before the brackets) means that Nama can borrow funds on its own. The liability for such borrowing will fall on Nama or on the taxpayers. Care to tell what happens if Nama cannot meet its liabilities on borrowings not guaranteed by the State? Yes, right, the Minister will have to rescue Nama from Nama… using the taxpayers funds! Why would we allow a state-owned entity with defined remit an open access to borrowing?!

The bit in the brackets is also telling. It shows that Nama will be able to issue its own bonds (debt securities) and that it will be able to ‘borrow’ bonds from the Government. The latter, of course, means that the following scheme to finance Brian Cowen’s egregious public sector payoffs (oh, sorry – deficits) can be run:

Step 1: Nama, with a permission of Brian Lenihan, ‘borrows’ from NTMA freshly issued bonds.

Step 2: Nama ‘lends’ these bonds to the banks who then monetize them through the ECB;

Step 3: Banks ‘repay’ Nama with cash;

Step 4: Nama ‘repays’ the Exchequer;

Step 5: end game is: Brian Lenihan gets Mr Cowen more dosh to waste on public sector expenditures; Nama is clear, and the banks got a shave off the transaction. The taxpayers are, without being informed, soaked for the amount of bonds issued by NTMA.

§2.1 of the Note clearly is extremely guarded when it comes to assessing the potential effectiveness of Nama on liquidity markets and on the Irish banking sector. It does not show full credence of the ECB in the scheme’s ability to repair our broken banking sector. This, in itself, is understandable, as ECB is always reluctant to go out of its comfort zone endorsing adventurous member states’ plans. But it is a serious concern, given that the Government has no plan B should Nama fail to repair credit flow or inter-bank funding in the Irish economy. In addition, §2.1 is not really dealing with the issue of credit flow, but rather with the ability of Irish banks to access funding. So ECB is being cautious in endorsing Nama as a tool for clearing banks’ balance sheets, not as a tool for repairing the overall credit flows.

§2.4.3 is worth quoting in full: “Third, regarding the valuation of eligible assets, asset-specific haircuts on the eligible assets’ book values appear to be contemplated, and independent third-party expert opinions play a role in the valuation process for the NAMA scheme. The detailed provisions of the draft law regarding valuation issues reflect the fact that the pricing of eligible assets is a crucial and complex issue that is likely to determine the overall success of the NAMA scheme. Although the measures contemplated by the draft law should restore confidence in the Irish banking system, the ECB considers it important, in line with previous opinions that the pricing of acquired assets is mostly risk-based and determined by market conditions. The preference expressed in the draft law for the long-term economic value of assets, rather than current market values, requires careful consideration in this context. In particular, it should be ensured that the assumptions to determine the long-term economic value of bank assets will not involve undue premium payments to the participating financial institutions to avoid creating inappropriate incentives from their side as regards the use of the scheme.”

Several things worth noting here:

1. Unlike in the case of Nama effectiveness on economy and inter-bank credit, the ECB is clear that “the measures contemplated by the draft law should [not ‘might’] restore confidence in the Irish banking system”. This, of course, simply means that banks’ shareholders and bond holders will win unambiguously from Nama. And the economy and the taxpayers, well, they just might see some improvements… Any questions, anyone, as to who benefits?
2. The ECB is clearly unhappy about the ‘long-term economic value’ being used as a basis for pricing. The ECB is also clearly concerned that Nama pricing will provide an ‘undue premium payments’ to the banks – in other words, a pay off at the expense of the taxpayers. Now, per ECB remark, the entire process hinges on whether we can trust Nama (i.e Irish Government) not to skin the taxpayers to give a helping subsidy to its cronies (national banks). You be the judge if you can extend them this trust.
3. The ECB, alongside myself and other critics of Nama, and in contrast with the Government position, clearly states that ‘assumptions’ are crucial. Assumptions that go into pricing models are, of course, of preeminent importance for they will determine exactly the level of pricing deployed. The Government, to date, has not produced any basic assumptions to be used in pricing, other than those contained in overly optimistic statements by the Taoiseach and other members of the Cabinet. These, of course, have ranged from calling the end of Irish recession back in May this year, to a ridiculously uninformed estimates of the speed of property prices adjustments post bust in other countries (7-8 years estimate by the Government officials and consultants), 15 years plus estimated by academics (my own estimate based on IMF and OECD data for past busts since 1970 through 2003 is that for the serious busts similar to the one experienced by Ireland today, the correction takes on average 18 years and in some instances can take more than 20 years).

 To repeat here a simple mathematical exercise. If our current values are at 50% of the 2006-2007 peak, and we are to get back to the same peak values in 8 years, the required rate of growth in property prices to achieve this feat will be 9.1% per annum on average. To get to 80% of the peak price in 8 years requires over 7.6% annual average growth rate from 2010 on.

Oh, and as I’ve said before, this is before you factor in the cost of financing. At, say 5% pa, we are looking at double digit growth required annually on average for the next 8 years to get us to within 60% of the peak value in 2006-2007, let alone to 80%!

You be the judge if we can get such growth stats out of the property market, especially with Nama sitting on a pile of surplus properties, but to put it into perspective – the craze of 2003-2007 have not seen such rates of price inflation.

§2.4.4. clearly states ECB’s dislike of the levy idea as being potentially destabilizing to the banking sector. It is also hinting at possible illegality of such a levy as being a challenge to the need to provide a ‘level playing field’ for participating institutions.

§2.4.6 refers to the risk of political interference in Nama and the potential impact of Nama under political tutelage on banks in the longer term. This is related to the fact that the ECB is cautious about endorsing Nama’s economic effects. And the same is confirmed in §2.4.7, but this time around from the point of the banks themselves. Here the ECB is noting that Nama might lead to credit markets remaining tight as banks might focus on “preserving and rebuilding their own equity, instead of lending into the economy”. But, of course, the ECB’s note on this is not an accident – Nama legislation, that is allegedly designed explicitly to ensure restoration of functioning banking system in Ireland has absolutely nothing to say about this crucial factor. 

So on the net, I wouldn’t count the ECB note as a sound endorsement of the Nama plan as outlined so far by the Government. And I am not surprised – the entire idea of Nama, inclusive of the proposed legislation leave more questions unanswered and more concerns unaddressed than a first year undergraduate paper on how to manage the economy.