The NAMA saga is set to become even more arcane with the onset of the Orwellian-named SPIV, writes Bill Hobbs
26th October 2009
Understanding NAMA’s business plan is as frustrating as trying to pin jelly to a wall. Last week, Finance Minister Lenihan said the business plan was an indicative draft, meaning it will of course change in time. Anyone familiar with drafting business plans knows full well that trying to plan beyond a two or three year time horizon is so fraught with risks as to be nonsensical. And business plans have an annoying habit of becoming worthless pieces of paper when it comes to executing them - more so as their underlying assumptions often prove to have been too optimistic. The longer the planning horizon, the greater the chances of getting it wrong – the NAMA plan is ten years long.
The odd thing about the Minister’s indicative draft plan is its assumptions – the gelatine used to bind it together- were central to Government’s proposal to keep the €54bn it will pay for toxic loans, off the national balance sheet. Yet this inventive proposal remained hidden from public view until an EU agency, Eurostat, published communications between it and the Irish Central Statistics Office.
Governments’ solution to its balance sheet conundrum was disclosed over the internet, not by the Minister or his department but by Eurostat’s public transparency process. In publishing communications between it and the CSO, it showed how the mechanism hatched to keep the national balance sheet clear of toxicity is an eloquent sleight of hand requiring a hefty dose of lateral thinking – in short a convenient fudge to prevent Irish sovereign debt adopting Icelandic rating characteristics. Eurostat’s public transparency starkly contrasts with the Minister’s fuzzy disclosure on all things related to NAMA and the banking crisis.
NAMA will not take ownership of bad loans and will not be responsible for recovering whatever value can be extracted from fallow fields, uninhabited residential property and vacant office blocks. Instead a special purchase investment vehicle, a SPIV, will buy the loans and will oversee their break-even or profitable repayment. It, and not NAMA, will issue government guaranteed bonds to buy the banks bad loans and will also issue the non-guaranteed risk sharing bonds – the ones that act a claw back mechanism should NAMA incur higher losses than assumed in its ten year business plan.
The SPIV will have governance and operational responsibility in persuading near bankrupt borrowers to repay €77bn in loans from assets assumed to be worth at best only €47bn today. Another assumption is it may make a profit of over €4bn should property values rise under an assumed future value trajectory. Just how borrowers are going to trade property to realise the profits required to fill the €30bn difference between what the loans are assumed to be worth today and what they really worth, which has yet to be assessed, is not clear.
What’s more the SPIV will be capitalised by €100m with the state taking a 49% share and a group of as yet unknown private equity investors owning 51% - a controlling interest. However the intention is the Minister and NAMA will be able to override any commercial decision the SPIV board makes were it to conflict with the taxpayers interests – which brings to mind how exactly the tax payers interest is to be defined, transparently overseen and protected. The risk is, within the labyrinthine governance and operational complexity of the NAMA/SPIV, sectional business interests may be commercially afforded extreme forbearance at ordinary people’s expense. Is the citizen to be blindfolded by the invocation of the all too convenient insider excuse of “commercial sensitivity”? Bland assurance that Ministerial oversight will best protect the public interest hardly holds any water given the events of last week when the Irish political and civil servant cultural predisposition to secrecy and partial disclosure was exposed over the internet.
Both the NAMA business plan and CSO/Eurostat communications illustrate how captive ordinary Irish people have become of the business interests of two overly dominant enterprise sectors- construction and banking. Government, for largely ideological reasons, is eschewing temporary bank nationalisation and promoting NAMA as some form of low cost profit making property investment and economic recovery vehicle that will get banks lending again.
There is no legally enforceable mechanism that will force commercial banks to use the cash released from their bad loans to make new loans to struggling Irish businesses and consumers. As the ECB unwinds its extraordinary intensive care support, the two dominant universal banks, AIB and Bank of Ireland, will be forced to fend for themselves in the money markets. It is highly likely they will use the cash raised from trading the bonds the SPIV pays for bad loans, to replace the ECB’s emergency cash life-line. Banks may also use the cash to adjust their balance sheets by investing in high yielding low risk Irish Government bonds. The circular flow of money from loans to bonds to cash, facilitated by the ECB and Eurostat, is seen by many as a mechanism to ensure Government can finance a gaping hole in its budgetary arithmetic.
Meanwhile NAMA and its daughter, the SPIV, will take the tax payer on a magic mystery tour during which zombie builder and developer businesses will not be required to pay a cent until 2013, in the belief that property values having floored will once again begin to rise.
Yet there is no public manifestation of property prices stabilising – instead house prices continue to slide. As a paper exercise NAMA’s assumptions are flawless designed as they are to bail out banking and to keep the costs off the national balance sheet – but as a realistic business plan they are at best loose approximations of a desired state that depends on factors outside NAMA’s control.
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