The Zombie is dead

In the last 2 years the expression “Labours way or Frankfurt’s Way” has been thrown back at Labour from the right wing cynics.  Often these people take the term out of context.  It was a line contained in a speech by Eamon Gilmore during the 2011 General Election.  He was speaking about how Fianna Fail and Fine Gael had accepted the financial straight jacket of the bail out terms set out by the Troika.  Of the troika it seems the IMF & EU are capable of being flexible in relation to the conditions of the bail out. The EU needs a country to emerge from the fiscal hell of bail out.  The IMF was not the boogie man it was held up to be. It’s the end of 2 things, Anglo (IBRC) debt and the promissory note by which FF & the greens bailed out the failed bank.

It’s the ECB, our friends in Frankfurt that Eamon Gilmore identified who need to get real in relation to the impact of the bail out.  Liquidating IBRC or Anglo is something that should have happened in 2008. It’s exactly what the ECB may not like but austerity isn’t just for citizens, perhaps it’s for institutions too. The dry reference to the Irish operation and taking note of the arrangement between the Irish government and the Irish Central Bank can cover a multitude of things now and into the future. Our friends in Frankfurt may need to swot up Irish politics.

The politics of the liquidation is interesting. Labour opposed the bank guarantee on the basis of a liquidation being a better than the state bailout.  The logic of that position is to liquidate. Sinn Fein supported the bail out and now oppose the liquidation. There is a perverted logic in that too if you’re a banker, developer or believer ion socialism for the rich and capitalism for the poor.  Strange given that the party is concerned at the number of state employees earning more than €100K and IBRC has a significant number of them. Predictable given that the legislation halts any legal actions against IBRC and there still remains the matter of the Quinn assets to be decided by the courts. Sinn Fein have been hugely supportive of Quinn.  What happens to Quinns properties now will be a matter for the court and the liquidator.  It’s not the first time company law has needed emergency legislation.  Administration was brought in to save PMPA, Examinerships to save Goodman.  The more convoluted and complex the fiscal shambles becomes the more exposed Sinn Fein policy is exposed for its naivety. Are they spooked by the independents right and left?    

The liquidator will pass on performing assets to NAMA and then dispose of the left overs.  Many employees may be re-employed at NAMA but under different contracts and salaries.  Ironically Libertas who opposed the Fiscal treaty argued voting No would lead to a better deal on bank debt.  In fact the opposite has proved correct. The beast is dead, deeply regretted by Gerry Adams and Libertas but I for one, shed no tears. Time to move on.

Lenihan “At The Races” as NAMA staggers to the starting post

So now we know how NAMA is proposed to work. A very telling error appeared on RTE’s Six One this evening as Brian Lenihan explained how NAMA would work. For about 45 seconds of the vital interview with Bryan Dobson in the top corner the term “At The Races” appeared when the picture cut to the Minister at Government Buildings. Very apt for the gamble of the century which Fianna Fail and The Greens are about to undertake on behalf of the banks.
The following figures are frightening and are the money behind the FF & Green gamble;


Potential total book value for transfer to NAMA 77bn
Interest Roll up Estimate 9bn
Balance excluding roll up 68bn
Approximate average Loan To Value ratio 77%
Assets value at origination 88bn
Potential decline in property prices approximate estimate 47%
Estimated current market value of underlying asset 47bn

The bung for the dubious honour of doing the business with FF’s banker and builder friends is €7Billion. That’s almost doubling spending at a stroke on the HSE without any plan how to spend. Long term economic value? Sounds like playing for short term political survival. Of course the seeds for this were sown in the bank guarantee scheme of almost a year ago. The bankers have won once more at the expense of those who need social welfare, an education or medical attention. Developers have now morphed into Borrowers,

Finance Minister Brian Lenihan’s attempt to soothe the anger ignores many worries behind the scene. Justice Frank Clarke decided last week that Zoe’s chances of survival were slim and that the economic recovery plan was unlikely to succeed. What are the chances of the empty houses in the market (overhang) being sold in the likely context of growing unemployment and increased interest rates in 2010? If rents are falling and the number of vacant houses rising, who’d buy a new house if repossessions climb? Who’ll have the money to buy a repossessed house? I don’t know where the bottom of the Irish market is although I accept that the minister may be right and that values may increase by 10% over 10 years don’t forget that about 20% of the NAMA land is outside the state and that some of these countries may already be out of recession so the increase in property prices will not be evenly spread but the rising foreign tide may give a false impression of the domestic Irish boat. A recent survey in Mullingar showed about 20% of Main St property vacant. There’s nothing to suggest that this observation is unique to Mullingar. Surely that should drive the rental cost of commercial space down? Then why is NAMA banking on an increase in rental? The great unknown is what happens to demand for housing if emigration takes off when European economies come out of recovery in terms of employment. Profitability often precedes an upturn in employment, if France, UK or Germany are out of recession, workers here will be attracted to those economies. I disagree with Brian Lenihan, I think we’ve yet to see where the bottom of the market is because we don’t know hat price houses will start to sell again at. Certainly some of the advertised prices in local papers in Wexford are still well beyond of what people can afford because of pay cuts, unemployment etc. I believe that the state will soon be left holding the baby while the bankers who Brian Lenihan tells us should be grateful to us will once again smile smugly into their G&T as they get away with the money.

The price of everything and the value of nothing

The last day of the legal term sees the builder’s bail out hovering on the precipice. The refusal of examinership to Liam Carroll’s group of companies will strengthen the arm of ACC Rabobank in their campaign to hold on their AAA credit status and muscle the government into a bank buy back while rescuing some liquidity for themselves. Ironically almost 20 years ago the Dail was recalled from a summer recess to put through examinership laws to rescue then FF supporter Larry Goodman. Now another recall is on the cards to bailout more FF supporters, the top 50 developers in the country and their lending institutions through NAMA. The best endorsement for NAMA that explains it to most people was the Green Party description of it as "the best least worse option". Make no m,istake about it the Dail will be back early as the inertia wears down what's left of the specualtors bubble.

Basically it works like this. Bank sells bad (toxic) loans to NAMA and is paid in bonds at a reduced price (discount). NAMA gets to work through these loans with the developer. The theory is that the tax payer won’t be hit because the developer will then be able to draw down money from the bank to complete construction while paying off NAMA. In theory at the end of the day the government thinks it will get back whatever it puts in.

But will this work in practise? When tribunals were being set up we heard that they would raise cash because findings would be actionable by Revenue. The problem was that those with a vested interest trot off to the High Court at the drop of a hat to protect their interests. Costs soared and the tax payer was hit. A developer may well go to the High Court to challenge a move by NAMA or indeed the very legislation that sets up NAMA.

What’s often forgotten is that many of the bad loans handed out are in relation to foreign property investments. I see no value to our economy in bailing out these however the reality is that with many of these in the north or Britain, they have more potential for recovery on the loans than many of the Irish properties destined for NAMA. As Jack O’Connor asks what will be the social role for NAMA in housing? Will the residential property be used to house those on the housing list by the state? My feeling on the matter is that with other econmies set to enter recovery before Ireland’s emigration will increase further reducing the demand for housing and depressing prices and demand. As a consequence to remove the overhang would it not make sense for the state to take up empty residential units as part of the charge to developers within the NAMA basket?
What about completed developments where no purchaser is interested? What should be done with the entirely speculative properties that were built and will not be filled? In the 19th century free market liberal economics meant that Ireland had deserted villages after the famine. Has our economic thinking moved on in 160 years? I doubt it!
My biggest concern with NAMA is in relation to the values put on properties. Which values determine the value on which the discount is established? Are these values the ones when NAMA was set up or when the market was at its peak or when the loans were taken out? I’m worried at what may ensue behind closed doors when it comes to the negotiations to set values. Already we've seen Carroll been accused by the judge of guilding the lily when it comes to values which he claimed were independently established. Can you trust any of these developers who specualted on sentiment as if it was hard currency and how can you protect the taxpayer at the same time?
Either way the tax payer will either give the developer a soft deal and have to compensate the banks or else bail out the banks and effectively re-ignite property speculation based on a tax payer subsidised depression of property prices. Heads they win, tails we lose!