The Irish Independent reports that NAMA will only recover €16bn for the taxpayer on the €40bn it intends to spend on risky property loans from the banks, Standard & Poor's (S&P) has estimated.

The agency, which downgraded Ireland's credit rating on Tuesday, said that only €16bn (equal to 10pc of GDP) would be recovered based on information it had seen. It didn't elaborate any further. The Government, on the other hand, hopes to make a full recovery of the entire amount. S&P, which competes with agencies Fitch and Moody's, said the €16bn would be recovered "over the timeframe that our ratings address". The Irish Independent established yesterday that this was a reference to a five-year period.

The National Treasury Management Agency (NTMA) strongly disputed the S&P claims yesterday, saying the agency was effectively declaring NAMA assets to be worthless.

But the agency makes it clear this is not the case. Instead it is worried about the ability of NAMA to turn its assets into hard cash in a short space of time.

"In our view, the loans that NAMA is acquiring have limited liquidity and cannot readily be sold in the near term,'' S&P said.

Liability

Referring to the first batch of loans NAMA has taken over, S&P added: "We view these loans as having value, and as recoveries occur in the medium term we expect them to be available to pay down general government debt."

The NTMA and the agency seem to differ over when Ireland should be given credit for taking over the assets. S&P said that when sales actually take place "we may revise our ... estimates of Ireland's gross and net general government debt".

But the Government, the EU and the statistics agency, Eurostat, take a different view, allowing the Government to move NAMA and associated debt completely off the balance sheet. Instead of becoming a direct liability, it becomes a contingent liability, making the net debt figures for the country look better.

But S&P has a different approach and made it clear yesterday this method was also being applied to other countries, like Spain and Cyprus. "We deduct only those assets which we believe to be equivalent to cash," said the agency.

This emphasis on liquid assets, as opposed to harder-to-value property assets, was the main cause of disagreement between the NTMA and the agency yesterday.

S&P believes the ultimate haircut on NAMA assets will be 46pc, as opposed to its previous estimate of 45pc. It also thinks Ireland will have to borrow about €40bn to buy NAMA assets, as opposed to €43bn.

"We have adjusted this amount to take account of the fact that 5pc of NAMA's payment to the banks is intended to be in subordinated debt that has no recourse to the Government,'' it adds.

"NAMA's own business plan applies a discount of 50pc on the nominal amount of loans it expects to be transferred from the bank,'' S&P pointed out.

NAMA is currently working on moving its third tranche of loans out of the banks. The deadline is next February, when the EU has demanded that the process be completed.

The Irish Independent also reports that an error by Anglo Irish Bank has led to the bank failing to register a claim for €15m against the failed Icelandic bank Kaupthing, the Irish Independent has learned.

Anglo, nationalised in January 2009, was a senior bondholder with Kaupthing and is among thousands of creditors looking to recover some value from its investment in the bank.

It is understood that a "process error" meant the bank did not make a final deadline for staking a claim and chief executive Mike Aynsley is believed to be angry about the situation.

Anglo is nominally owed €15m by the Icelandic bank, although there was no certainty it would have recovered the full amount. But the bank was unsuccessful in registering its claim due to an error and is now appealing, claiming the rules for submitting claims were unclear.

It is understood Anglo had originally made a claim but was required to resubmit this claim and failed to do so.

If the appeal is successful, the bank will be able to claim a percentage of the original amount. Anglo has written down the value of the bonds in its books to about €600,000.

Crisis

Kaupthing, based in Reykjavik, was a victim of the Iceland banking crisis of 2008 and ended up being declared bankrupt, causing huge losses for those holding securities in the bank.

It was at its peak the largest bank in Iceland and was the seventh-largest Nordic bank.

Anglo itself is presenting its half-year results next week and is expected to unveil further large losses, although not on the scale of its last financial results.

The movement of its loans to NAMA will be the chief factor in the results, to be unveiled by Mr Aynsley and other senior directors.

Kaupthing is currently run by a resolution committee. The role of the committee is to safeguard the value of the bank's assets and to maximise the recovery of claims on behalf of creditors. The resolution committee holds the powers of the board of directors.

The Irish Times reports that the National Treasury Management Agency (NTMA) yesterday took the unusual step of trying to dampen concerns over the Republic’s fiscal stability by publicly criticising rating agency Standard Poor’s (S&P) one-notch downgrade of Ireland.

Describing the methodology behind the downgrade as “flawed”, NTMA chief executive John Corrigan said the rating agency’s decision not to attribute any value to National Asset Management Agency (Nama) loans was “not a realistic approach in our view”.

“Exceptionally, we’ve taken issue to the rating agency. There comes a point when the analysis is not robust," Mr Corrigan said in an interview with RTÉ.

The S&P downgrade came on the back of the projected cost in bailing out the Irish banking sector, with the rating agency revising upwards its estimated cost of recapitalisations to the Irish Government to € 45-€ 50 billion. Of this, up to € 35 billion could be spent bailing out Anglo Irish Bank “over time”, due to asset deterioration, while SP also said that “similar developments could take place at some other Irish banks”.

However, Mr Corrigan responded by saying S&P’s estimate of the cost of repairing the banking system was “at the extreme end of any analyst’s comment”.

While it wasn’t apparent yesterday that the markets had responded favourably to Mr Corrigan’s assertions – the spread on the yield of Irish bonds compared to German bonds reached a new high of 344 basis points – market analysts nonetheless came out in favour of the highly respected debt management agency’s stance.

David Schnautz, an interest-rate strategist at Commerzbank in London, said he felt “more in the camp of the NTMA”, and that he sympathised to some extent with the NTMA.

While he acknowledged the need to reassess the Government’s credit risk, he described S&P’s decision to treat Nama loans wholly as debt as a view he didn’t share. “Hopefully it will get something back,” he said.

Oliver Mangan, chief bond economist with AIB Global Treasury, also argued Nama loans were “worth something, not worth nothing” and that there was no harm in the NTMA making its displeasure known.

Investors across Europe were also positive on the outlook for Irish bonds. Lothar Mentel, chief investment officer at Octopus Investments, told Bloomberg News he was more a “buyer than a seller” of Irish bonds, and he criticised the rating agencies for being “overly cautious” following their poor track record in rating securities leading up to the credit crunch.

Fine Gael finance spokesman Michael Noonan described the downgrade as a “hammer blow to the economy”, and blamed it on the Government’s “failed banking policy”.

“In particular, confidence is being undermined due to uncertainty over the final cost of the bank rescue.” He called on Minister for Finance Brian Lenihan to “give certainty to the markets” by putting a final figure on the cost of the bank rescue.

S&P has the most aggressive stance on Ireland, reflecting its concerns of the cost of supporting the banking sector, but its view is at odds with that of its counterpart Moody’s, which on Monday published a report reiterating its “stable” outlook for Ireland.

The Irish Times' Simon Carswell says it was not the smartest response by the Government’s debt management agency, the National Treasury Management Agency (NTMA), to a further cut in Ireland’s credit rating by international appraisers.

Publicly challenging not only the views of a credit rating agency but its methodology is rare, if not unheard of, in financial markets.

“It is very difficult and probably unwise to fight the market,” said one economic commentator who added that it also brought the issue further into the spotlight.

The reasons for Standard & Poor’s (S&P) downgrade – rather than the downgrade itself – and putting Ireland on negative watch (meaning a further ratings cut is likely) is what has brought the agency out fighting.

S&P blamed substantially higher costs to support our struggling financial institutions, namely Anglo Irish Bank, and the cost of buying impaired loans through Nama for the downgrade.

The agency said S&P’s analysis was flawed – it had failed to assign any value to assets, such as loans backing valuable properties in London, purchased by Nama as well as the Government’s investments in AIB and Bank of Ireland.

Chief executive of the NTMA John Corrigan said that S&P’s way of calculating government debt did not match the approach of the International Monetary Fund or the European Union’s statistics agency. In SP’s defence, it is consistent – its analysts have used the same method to determine the debt and ratings of Spain and Cyprus. “If you are in Germany, who are you going to believe?” asked one banker rhetorically, pointing to the futility of the NTMA’s defence.

The rate investors demand to hold Irish 10-year bonds over the equivalent German bond rose to a record level before falling slightly.

The trouble is not with S&P but in the uncertainty about the final cost of Anglo, what the Government plans to do with the bank, how big a stake the Government will have to take in AIB and whether the banks can stand alone without the guarantee.

The Government’s problem is that it is relying on the European Commission, Nama and the markets for resolution of these issues.

Meanwhile, the capital bill at Anglo is heading towards €25 billion with no certainty it won’t rise further once Nama assesses the quality of the remaining €20 billion in loans it will purchase from the bank.

All this comes at a difficult time for the banks as they seek to refinance more than €20 billion in debt before the end of the blanket two-year guarantee next month.

The Irish Examiner reports that Nobel Prize-winning economist Joseph Stiglitz has said that Government cutbacks are hindering Irish and European recovery and could lead to "a longer- term Japanese-style malaise of weak growth".

The author of Freefall said Europe’s cutback culture could push it back into recession. He specifically criticised the Irish goal of returning to a deficit of 3% of GDP by 2014.

"I think that is a kind of short-sighted behaviour that makes no economic sense," Joseph Stiglitz told listeners to Morning Ireland on RTÉ Radio 1 yesterday.

No business ever expresses its targets in terms of how much debt it has, or in terms of how much deficit it has. It looks at its balance sheet, its liabilities and its assets.

"In the US, had we just spent a little bit of money building those levees in New Orleans, we would have saved a couple of a hundred billion dollars. The internet was financed by the US government, the most important innovation in the latter part of the 20th century. Cutting back willy-nilly on high-return investments just to make the deficit picture look better is really foolish."

Mr Stiglitz said it was important that governments spend wisely, but added that capital spending is vital to drive recovery. He said Ireland’s current cutbacks show a lack of vision on how to engineer recovery.

Mr Stiglitz said: "Your government allowed the economy to become totally distorted, with a real estate bubble and with a banking system that was under-regulated. I am very critical of what happened in the US, but there are other countries that also allowed things get out of hand, and Ireland and Iceland are among those, worse even than the US.

"To get things going again, you need to have a vision of where you want to go. You don’t just want to get yourself back to where you were in 2007. There was something fundamentally wrong with what we were doing in 2007 – a wrong view of the balance between the market and government, a wrong view of the direction of our society and our economy. Unless you have a vision of where you want to go, you will be back making the same mistakes that got us into this mess in the first place."

He said the deficit target of 3% of GDP was an artificial number, which could lead Europe into a double-dip. "What we’re doing is setting ourselves for a longer-term Japanese-style malaise of weak growth for an extended period of time. It’s disturbing that people are talking about a new normal, with unemployment of 8%-10%, which would be devastating."

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