Ireland should renege on €30bn NAMA bonds

Let’s leave our useless banks with worthless IOUs, writes Mick O’Broin.

Even before it emerged that the National Assets Management Agency (NAMA) was definitively bailing out developers, its dealings with banks were problematic. NAMA is, as Enda Kenny said from the opposition benches, “another blank cheque to bailout the banks”. And, like the bank bailouts in general, there has been a variety of voices pointing out the illegitimate nature of the public debt generated by NAMA.

It’s not only that the €32 billion NAMA pumps into the banks seems spectacularly unjust in the context of budgetary cuts. NAMA is also a key part of our sovereign-debt meltdown. The Irish government, with the consent of Europe, offloaded NAMA’s exposure via a Special Purpose Vehicle to keep it off the state’s balance sheet. Unfortunately for us, however, international credit ratings agencies like Standard and Poor were quick to see through this not-so-creative accounting and have considered NAMA debt as public debt from the outset.

To make matters worse, NAMA has failed.

The objectives of the unorthodox agency were to stabilise the banks and provide them with liquidity, thus getting them lending again. Since the NAMA Act of late 2009 the Irish banking sector has, however, required further recapitalisation and even nationalisation. According to ISME and others, the banks haven’t been lending either.

Moreover, while NAMA was supposed to raise the €32 billion for the banks on the basis of the property-related “assets” it acquired from the five participating banks, the most likely outcome is that NAMA won’t get anything near that amount due to the continuing descent in property prices. While the then Fianna Fáil government initially claimed NAMA would make €5.5 billion, the agency reported losses of €1 billion in 2010 alone, primarily because the value of its loan book has been written down to reflect property-price drops. If, or rather when, NAMA can’t come up with the €32 billion the Irish state picks up the tab.

The NAMA bank-bailout is too often filed under the rather overcrowded category of ‘it already happened so there’s no point talking about it’. What many people don’t know is that we haven’t paid the NAMA debt yet: it’s not too late to say no to NAMA.

While NAMA is a vehicle for injecting money into the participating banks, it does so by issuing Government Guaranteed Securities, or NAMA bonds, rather than hard cash. Nama bonds are essentially IOUs which the banks can then use as collateral to raise funds, mainly from the European Central Bank. The Nama bonds themselves will be paid between now and 2020 as Nama attempts to realise the value of the property-related assets it has taken from the participating banks.

So how much have we paid back so far? The appearance of NAMA CEO Brendan McDonagh and Chairperson Frank Daly before the Dáil Public Accounts Committee last October provided a rare glimpse behind the scenes of the notoriously secretive organisation. On that occasion, McDonagh indicated that NAMA had paid back just €1.25 billion. This leaves over €30 billion still to play for.

If the NAMA bonds, for the most part, are yet to be paid then the debate around that debt must remain open. But what would it mean to tear up the remaining NAMA bonds?

Essentially any such action would reverse NAMA’s bank bailout leaving the banks with about €30 billion of worthless IOUs.

Of course any such move would be risky in the context of an already chaotic banking sector. But the government-guaranteed NAMA bonds in the hands of the banks also represent a serious risk, particularly to our credit rating. This is particularly significant as talk of a second bailout abounds.

A closer inspection of how the NAMA debt is playing out raises further concerns. Anglo Irish Bank was issued with around 37% of the NAMA bonds, or just under €12 billion. But if the purpose of this money was to provide collateral allowing the banks themselves to borrow, then why a bank which is clearly never going to function again would need them is unclear. Indeed the banks in general have decided against returning to lending and have preferred to speculate on Irish government debt, among other things. This means that Irish banks could be using NAMA bonds as collateral to draw down a loan from the ECB at 1% interest rate and then use that money to buy Irish government bonds which come with a much juicier interest rate. In July 2010, according to An Irish Debt Audit, AIB and Bank of Ireland were two of the top three banks holding Irish government debt.

Given the complete failure of NAMA on its own terms, not to mention the injustice involved, we should at least be investigating the possibility of reneging on some of the NAMA bonds. It is past time to move beyond knee-jerk catastrophising at the idea banks might take any kind of responsibility for the crisis they caused.

The objective of much government policy is to get the financial sector back on its feet, at whatever cost. But what if our objective were something altogether different, such as challenging the concentration of wealth and power in the financial sector and breaking the relation of dependency that is crippling both our democracies and our economies? Walking away from the NAMA would be a first step in the right direction.