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| The site of the former Irish Glass Bottle plant, Ringsend, Dublin (within red contours). It was purchased in 2006 for €412 million, by a consortium led by developer Bernard McNamara. |
The Government is reported to be considering deferring payment on some of the bonds to be issued to the banks by the "bad bank," the National Asset Management Agency (NAMA) to ensure more equitable risk sharing between banks and taxpayers, when NAMA becomes the repository of property-related loans worth an estimated €90 billion.
The Minister for Finance Brian Lenihan plans to outline the framework for the concept of "long-term economic value" next Wednesday and since the publication of draft legislation in late July, which had been agreed by the Cabinet including the two Green Party ministers, Opposition politicians and academic economists have gained traction in highlighting the potential for abuse of a system based on assumptions on future property value.
Incoming governor of the Central Bank, Professor Patrick Honohan of Trinity College, said in an article in The Irish Times in August, that "the risk to the taxpayer can be considerably reduced with a bit of ingenuity. It is worth tweaking the language of the NAMA legislation to make sure that it can achieve this risk-reduction.
The proposed legislation makes it clear that the price paid for any acquired asset is not to be above what it calls the 'long-term economic value' – essentially the price that the asset can 'reasonably' be expected to attain in stable market conditions."
"If confirmation were needed, it has been provided by the discussion in recent days of what troubled property developer Liam Carroll’s portfolio might be worth. After all, this kind of uncertainty is the main reason that NAMA is being set up: to enable the banks to exchange these problem assets for safe and marketable assets," Prof. Honohan wrote. "There is, if you will, a difference between the value that can 'reasonably' be expected and a lower basic price that can 'confidently' be expected," he added
Prof Honohan said improved risk-sharing could be achieved in a number of ways. One simple approach is to have NAMA make only part of the payment for the acquired assets in the form of bonds, with the remainder being made in the form of a claim on NAMA’s future recoveries.
A proposal currently under consideration, would have NAMA issue two types of bonds to the banks in exchange for their property and development loans.
The bonds, are in effect Government IOUs which pay interest until the State redeems the debts and the banks would receive a mixture of normal bonds and a second class of bond - - known as subordinated debt - - which would only be repaid if NAMA makes a profit as projected.
The latter would be unlikely accepted by the European Central Bank as collateral for funding for Irish banks.
Issuing subordinated debt to the banks, which would be repayable by NAMA over time, would be a means of charging a levy during the agency’s lifetime.
Green Party leader John Gormley has been reported as saying that he had the “utmost confidence” that changes in the NAMA legislation will be palatable to party members ahead of their meeting on Saturday in Athlone to discuss it.
“We have got in amendments around the protection of the taxpayer, risk-sharing and the whole question of future planning,”he said.
The Labour Party on Tuesday, said the Government should seek a discount of at least 50% on the purchase of bad loans under NAMA.
Meanwhile, the Construction Industry Federation (CIF) has expressed concern that NAMA's “extreme powers” will draw resistance from borrowers, particularly those who are meeting their commitments to the banks.
The draft legislation limits both the right of appeal against its decisions and the scope for getting court orders that will prevent NAMA from taking over loans and interests in property.
The CIF warns that the solution to the current crisis must ensure that the Republic has a viable construction industry.
CIF director Hubert Fitzpatrick has highlighted the importance to the Irish economy of a viable construction and property sector: “The majority of developed economies have a construction sector that accounts for 12% to 15% of GDP, contributing its fair share to a country’s economic growth and prosperity. The proposed NAMA legislation must be capable of operating fairly, efficiently and effectively so that the current difficulties in the banking, construction and development sectors can be addressed and employment and tax revenues can be restored.”
Journalist Kathleen Barrington has highlighted that the draft legislation "specifically provides that,’ ‘where the land concerned includes a principal private residence, a vesting order only takes effect to the extent that it does not affect that principal private residence’’. The principal private residence is defined as the private residence and garden of up to one acre. There is no ceiling set on either the size or the value of that principal private residence.
This raises the spectre of defaulting property developers continuing to live in palatial splendour, even as the family in the three-bed semi is forced to pick up the tab for bailing out the banks who so recklessly lent those same developers billions of euro in the first place.
Though the government has been at pains to state that the bankers and developers who got us in to this trouble will not benefit from NAMA, there are at least two key sections in the bill which indicate otherwise.
Section 110 provides that NAMA may agree performance fees and profit-sharing mechanisms with participating banks, while section 148 provides that NAMA may enter into an agreement with the debtor for the purpose of developing the land."
