Goodbody economist Deirdre Ryan comments: Economic View; Ongoing debate over NAMA hanging over further improvement in government bond spreads - -"We have commented previously on the large improvement in Irish Government bond yield spreads relative to their German equivalents, however, recent weeks have marked a slight widening of the yield differential. At the end of last week, 10-year Irish bonds were yielding 4.73%, 148bps higher than the German 10-year yield. The spread narrowed to a low of 138bps in mid August and has risen slightly to its current level since that time, although it still remains well below the ballooning spread levels seen in earlier months of the year. At its widest, the spread between Irish and German 10-year bonds extended to close to 300bps.

The CDS spread versus Germany exhibits a similar trend, with this currently standing at 136bps, up from a low of 110bps seen earlier this month. However, since the beginning of the year when concerns over the credit worthiness of Ireland were most elevated, the CDS spread measured has close to 320bps. There has been considerable improvement in the intervening period despite the very recent developments. These latest trends are likely a result of the ongoing debate over NAMA and the shape the final legislation will take when it is published on September 16th. The overriding issue of the ‘haircut’ to be applied to the loans transferred over to the agency still remains very much the key talking point and the consequent implications this will have for the government debt level and the recapitalisation of the Irish banking system. Until there is greater clarity on this issue, we may see any further improvement in Ireland’s credit worthiness halted somewhat."

Goodbody analyst Eamonn Hughes comments: Irish Financials; Press reports indicate NAMA payments could be staggered - - "Press reports over the weekend indicate the NAMA legislation may be amended to introduce a split-payment mechanism for purchasing the bank’s impaired loans. According to the Sunday Times, the plan would give the banks 80% of the “long term economic value” (LTEV) up front and would get the final 20% only when and if the loan realised its forecast valuation on repayment, sale or on sale of the underlying collateral - whenever that is. It appears the Green Party is actively pushing this amendment and the press report indicates that senior government sources have said that “they are pushing an open door”.

The split payment was first proposed by Professor Honohan from Trinity College (often mooted as on the shortlist for the Governor of the Central Bank). Presumably, the move is to protect the taxpayer by in effect creating a contingent liability on the outstanding amount rather than committing to the full amount up front and in its crudest sense, anything that protects the taxpayer will be coming at the expense of the equity or subordinated bond holders. Such a move would obviously provide a little less liquidity into the banking system initially. However, unless we are reading this incorrectly, receiving 80% of the “long term economic value” (LTEV) up front for the banks would crystallise further losses for the banking system up front, with the remaining 20% offset materialising if and when the loans are repaid or underlying collateral realised at the LTEV. Though, having said that, the longer the assets are held, the more likely the prices achieved ultimately revert to their long term economic value.

As such, it is no surprise then that the Minister is quoted again in yesterday’s and today’s papers indicating that the Government could be prepared to take majority stakes in the banks if that’s what was needed after NAMA. Today’s Irish Times indicates that while “not pre-judging the issue”, he acknowledged that State ownership could end up exceeding 50%, which is likely to be in the form of equity given his comments that any such stake would be in the form of shares that could be traded on the stock market, presumably through underwriting a rights issue. With the banks recapitalised post the initial transfer of assets to NAMA, the payment of up to the remaining 20%, as and when it happens, would provide further capital to the banks at a time when banks internationally will be required to hold more capital under revised regulatory rules.

Of course, there is likely to be much horse-trading in the coming weeks ahead of the NAMA debate and the Minister is just highlighting a range of possibilities, but it strikes us that the political risk ahead of NAMA is mounting as we approach the crucial debates. Mr Lenihan is appearing in front of an Oireachtas committee later today, so anticipate further commentary later on. In addition, many well known names locally (a previous Taoiseach from the opposition party and a previous Irish EU Commissioner) have come out in support of the NAMA process."

Davy's banking analyst Scott Rankin comments: Irish banks: Risks of NAMA are arguably easier to calibrate relative to the unknowns associated with nationalisation - - "The NAMA debate has focused on the price to be paid for the loan assets and how the taxpayer will fare under different approaches. However, little has been said about the downside of the nationalisation route, which is a natural outcome of the proposals put forward by many of those who oppose NAMA.

The main advantage of nationalisation is that the state transfers €5-8bn of 'value' from equity shareholders and possibly tier 1/UT2 bondholders to taxpayers, at least before compensation measures are considered. Note that this would be on top of the €54bn and €4bn of losses respectively that each investor class has already suffered.

However, deposit and wholesale funding outflows are inevitable as risk limits to the system shrink when the banks fall into state ownership. This could mean ECB/Central Bank funding to ALBK and BKIR rises rapidly from possibly as much as €40-50bn as of the last balance sheet date. If this happened, the ECB might not fund NAMA 2.0 as it would involve Ireland Inc. borrowing even more. Without this support, Irish development loans are stuck on balance sheet until assets are liquidated, and we could not get a big liquidity boost. Sovereign spreads would also widen again, meaning additional funding costs for the state.

The state also shuts off access to private capital. This means that it has to fill the capital hole created in the banks by itself, at least until the franchises issue IPOs or are sold down the road.

Third, politicisation of the banking industry is a potential problem. Would banks be impeded in their efforts to raise loan spreads and cut staff levels in order to rebuild profitability?

Finally, there are possible second-order effects as under nationalisation the trajectory for credit, and hence Irish GNP, could be worse over the next few years."