Nama & The Irish Property Market

Over the last decade of the Celtic Tiger economic boom, Irish banks have provided €90 billion in credit to property developers and investors. At least 50 % of these loans are in serious arrears and are unlikely to be repaid in full. Many property development companies have collapsed and most likely more will follow.

Without government intervention, the banks themselves may have collapsed, with very serious consequences for the Irish economy including the loss of savings by depositors and an inability by the government to fund infrastructure and services such as hospitals, schools and social welfare payments.

In late 2008 the Irish government promised to guarantee bank deposits until September 2010. The National Asset Management Agency (Nama) was proposed as a new institution through which the bad loans will be bought from the banks. The government has invested €10 billion share capital in the banks.

If the Nama plan is successful, the banks will be supplied with sufficient capital to recommence lending again. This does not guarantee that the banks will start lending again soon, but without extra funding they will fail to supply much needed credit to business, thereby enabling the economy to recommence growth. As many mortgage applicants have discovered, the banks and mortgage institutions are now extremely cautious about lending funds to purchase property

The downside to the proposed Nama plan is that it is a huge risk to the taxpayer. The government may well have to pay more than the loans are worth. The correct valuation of these loans is very much in dispute, with the assets they are based on falling in value every day. Ultimately the taxpayer will pay for the losses rather than the shareholders of the banks.

Another strategy is to nationalise the Irish banking system.If the government does decide to nationalise the banks, any overpayment will be reflected in the value of the banks when the government eventually sells them back to private interests. However, if we nationalise the banks, then it may be that international credit institutions will cease lending money to the Irish banks and, possibly, to the Irish government. Any credit the international institutions do provide may be at a higher interest rate.

Unfortunately, economics is far from being an exact science and economists differ over the correct strategy to follow to create long term growth in the Irish economy.

The Nama Business Plan:

Nama estimates it will buy €77 billion worth of loans, two thirds of these loans being in land and property development.

Nama will provide a fund of at least €5 billion to allow property developers to complete projects that Nama judges to be economically viable.

Nama expects 20 % (€15 billion ) of its loans to be defaulted upon, although this figure may change as it examines the documentation underlying each individual loan. Nama has calculated that it will receive €4 billion from the sale of these assets. However, the property market may stay depressed while NAMA retains around its estimated €77 billion worth of property.

Nama estimates that it will make a profit of €5 billion over the next decade.

This article is only intended as a basic general summary and you should always seek professional advice where necessary.

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