Wednesday September 16th is D-Day for NAMA.
So, what is NAMA ?
NAMA or the National Asset Management Agency is the government’s solution to the banking crisis in Ireland. NAMA will be a “bad bank” where all the Irish banks can dump their bad loans. Think of NAMA as a skip for all the bad lending by the banks during the Celtic Tiger. These are primarily loans for property development and speculation.
On Wednesday the Minister for Finance, Brian Lenihan, will announce how much NAMA will pay the banks for their property loans. NAMA will be taking over about €90bn worth of property loans from the Irish banks. Not all of these loans are bad loans. Repayments are being made on some of them.
The big question is:
“How much should NAMA pay for these loans?”
From a bank’s point of view, a loan is an asset. However, due to falling property values these loans are no longer worth €90bn. Will the government pay 20% or 30% less? The dilemma is if the government pays too little for these loans, the banks will lose out and will not have enough capital and therefore the government will have to put more money into the banks and could end up owning the majority of the shares in AIB and Bank of Ireland. If it pays too much for these loans, the taxpayer will have to foot the bill.
The government will pay for the loans by issuing government bonds. Therefore, our National Debt will increase further. The banks can then use these bonds as collateral to borrow cash from the ECB. NAMA will then look after the loans it has taken over. It will act in the same way as if a bank was in charge. It will pursue the borrower for all loan interest and repayments and may lend more money to builders to complete developments.
It is hoped that if NAMA buys these loans at a good price, it may in fact make a profit over time if property values increase. The banks will then have all the non-performing loans off their books and with the additional funding from the ECB should be able to start lending to businesses again.
NAMA is going to be expensive and risky. However, it may work and is now the only option to get the banks lending again to Irish business and consumers.
What do you think? Will it work?