Nama: Or paying off developers’ bad debts with a mass return to the emigration queues…

There’s been a lot of toing and froing on the Nama (or ‘dirty bank’) debate. Labour want to nationalise the failing banks whilst, Fine Gael, their likely partners in any new government want a ‘clean bank’ option. Regardless of anything else, all three agree that the way out will require stringent action from government. David McWilliams has from the off been hinting that the Department of Finance is suffering ‘accountant’s fever’ ever since the crisis hit: balance the books regardless of the damage it will wreak!

On Sunday he argued that the main problem with the government’s preferred option (and Alan Duke’s joined with Garrett FitzGerald to form the ‘former FG Taoisigh for Nama’ at the weekend too) is that it not only leaves the individual culprits in the banks in situ, but it’s an attempt to buck the market by giving away the keys to the national treasury (perhaps indefinitely) to keep the international bond market happy. McWilliams offers a traders point of view of the underlying problem and suggests a much simpler way of ‘getting out the trash’…

The last thing the trader wants is a country wracked by political instability, where taxes are rising and growth is falling. The trade has no interest in a country that is suffering unnecessarily to keep banks afloat. Why do you think we are paying a huge premium over Germany for our borrowing? It is because investors need protection because they don’t believe in Nama.

They have taken the view that no democratic government can lumber the people with taxes to pay for the sins of a few. That’s not how the world works. So they are looking at the pressure cooker, waiting for it to blow. Once it blows, the pressure eases and we are back to business. Remember: the world is full of money.

The German, Chinese, Gulf States and Japanese current-account surpluses have to be spent somewhere. But to get this cash, we have to offer an attractive option, a new option that sends a signal that everything has changed. Nama merely tells the world that the ‘lads’ are still in charge and nothing has changed. There is a better option than Nama, which will impress international bond investors much more. This is what rational businessmen would do. We’d tell the creditors of the bank that we don’t want to extend the guarantee. It will lapse, as was envisaged, on October 1, 2010.

At the moment, with the guarantee in place, the creditors know that they will get 100 per cent of their money back. On October 1, 2010, they know that they will get close to zero because the banks they took a punt on are bust. So the clock is ticking, what do they want to do? Where do they want to deal? At what price are they prepared to trade? Is it 30 cent in the euro? 50 cent?

The pressure goes back where it belongs: on the risk takers in the money markets:

…at the moment, it’s a one-way bet, with you and me acting as underwriters. This approach allows us, the Irish people, to get out of the way and let the creditors deal with the banks, with the government acting as broker rather than principal.

So we do a deal with the creditors and maybe give them equity in a new Irish bank in a debt-equity swap, which we will help set up. The state issues a deposit guarantee, paid for with a guarantee insurance product. We then have an orderly examinership of the bank, selling – let’s say – the branch network of AIB or other assets to the new bank, and off we go.

And here’s the kicker for backers of the current government approach. It would/could make the country competitive again without destroying the treasury by paying notional values on property to keep the developers (who, according to official figures compiled by, largely paid for this government) in the style to which they have become accustomed:

No need for Nama, and land prices stay low, allowing us to ‘lock in’ the fantastic competitive opportunity that a fall in land prices gives us. Then a New Ireland would truly be open for real business again and we could begin to talk up the economy with confidence.

Keep an eye on the Liam Carroll appeal case. That, in effect is a developer testing the government’s own hypothesis that land values will rise again in so far highly sceptical court system. With all that lovely new commercial real estate sitting empty on the fringes of Dublin, and the empty brand new hotel space round the centre of town, it’s not clear to me where this rising value is going to come from. Or how a small country mortgaged to the hilt to provide wholescale public subsidy to such a large (and in and of itself) unproductive vested interest can expect to regain the dynamism of the past.

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