When will you redeem the bonds, Minister?

Today, Wednesday September 16th, is NAMA day, when our Minister of Finance, (and probably the next Taoiseach) Brian Lenihan, will announce some estimates, and hopefully some hard details of the NAMA scheme and its impact on the banks.Nama-bonds

Most of the population, gripped by irrational fear of great losses by this stage, will be anxiously waiting to hear the estimate of the price the government will “pay” for the banks assets. This is posed as the number one question by most commentators, including all those who would hope to see the 150,000 + moma and pop Irish shareholders of the two main banks wiped out, as the banks fall into State hands through nationalisation. Indeed, the Minister holds the future of the banks in his hands- and the prospects that these unfortunate shareholders- many of them elderly retirees – may ever regain some of the enormous losses they have already suffered. If the Minister declares a higher price for the NAMA assets, then the banks don’t need to scrounge extra capital and dilute their shareholders further. (The Minister already has cheap options over 25% of their shares anyway, and will tax any of their gains at another 25%). If he declares a lower price, perhaps under pressure of the mob baying for shareholders’ blood, then he can wipe out the main Irish banks as Irish owned independent entities. (The State will take them over and in time some foreign banks- no doubt financially subsidised by their own finance ministers -will pick them up cheap, as some Irish economists recommend)

I feel it is highly unlikely that the Minister will wipe out the banks. He has too good a sense of the national strategic interest to do that. I hope, though, that he proposes a NAMA estimate that will be positive for the main banks, for their share price, to keep tens of thousands of retirees from the doors of state welfare agencies, for their prospects of raising extra equity capital at a fair price from private sources, as is now required under proposed new international banking rules, and for their financial capacity to fund the rescue of the real problem banks- Anglo-Irish and Irish Nationwide- over the next few years. AIB and BOI are fine banks, not run by greedy or corrupt people, and are owned in the majority by ordinary Irish shareholders, whose main motivation is not speculative but to prudently tap a source of regular dividend income in their declining years.

Furthermore, the price the Minister will pay should reflect the fact that he is proposing to pay only a paltry interest rate of 1.5% !. That’s three times lower than the current risk-related interest rate for Irish government borrowings in the marketplace. Depending on the terms, including maturity of the bonds, he should be paying 4.5% or more. That’s what Irish risk amounts to. So, 1.5% is a very big gain for the State, at shareholders expense -something in the region of 30% of the total NAMA asset value over a ten year period…call it 30 billion euros !

For me, the main question which the Minister may answer tomorrow is “When will you return the assets, Minister?”. This is currently the biggest unknown.

The Minister, via NAMA is only “paying” IOUs- bonds- for these tangible assets, assets which include cash flowing yearly from billions of euros of serviced loans. The side which accepts the bonds- i.e. the taker of bonds, in this case the banks – has to trust the side that issues the bonds- in this case the government/NAMA- that the bonds will be redeemed in accordance with the Terms agreed. The terms must say something- a lot, in fact- about when and for what consideration these bonds will eventually be redeemed. The Minister cannot go on indefinitely replacing the NAMA bonds with replacement bonds …At some stage, holders of these bits of paper must be able to cash them in at an Irish government window…When will this be, Minister?

Before that day comes, of course, the Minister, the government, on behalf of the taxpayer, will have almost free use of the banks assets, including, increasingly, the cash proceeds of the sale of these assets. That, in turn, means that the government avoids having to borrow that much money elsewhere, or raise it from the taxpayer, who is, in fact, the biggest winner from NAMA.

That said, it is a great scheme…liquid funding for the Irish banks, from the ECB, and, at the same time, an enormous injection of funds- 50-100 billion over some years, from the domestic banks into the Irish government coffers, to finance an economic recovery. The big next task will be to make sure we have the correct economic policies, now that we will have the funding.

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