Ireland Creates the Net Asset Management Agency

Without question, the past two years have been difficult for Ireland, with little hope for meaningful relief anytime soon. Just yesterday, the International Monetary Fund (IMF) said that Ireland’s economy will continue to decline at an “unprecedented” rate, and could shrink by as much as 13.5 percent by the end of next year. Unemployment is currently closing in on twelve percent and is expected to reach seventeen percent within the same time frame.

How quickly fortunes can turn. It was not that long ago that the “Celtic Tiger” was held up as a shining example of a true success story fashioned out of the new global economy. Now it seems, so much of that success was built upon a shaky foundation of government incentives and highly-leveraged land development projects that are now worth much less than the outstanding loans held by the country’s lending institutions. I know, I know – sounds familiar.

Last year, three of Ireland’s largest banks found themselves in danger of failing because of their exposure to these projects and the Irish government signed into law a bill guaranteeing deposits for Ireland’s entire banking system. The government also provided billions in direct payment to the Anglo-Irish Bank, Allied Irish Bank, and the Bank of Ireland, but despite these efforts, the IMF estimates that Ireland’s banks are still exposed to losses of 35 billion euros ($49 billion).

In response to the growing crisis, the Irish government created the National Asset Management Agency – or NAMA as it is to be known – and this new agency is expected to be operational later this summer. Just don’t call it a “Bad Bank” – according to a government “Q & A” circular released a few weeks ago – NAMA is “firstly an asset management company dealing with assets transferred from banks”.

NAMA’s role will be to buy the banks’ under-performing, property-backed loans and other sub-prime-related debt, thereby removing billions of dollars worth of losses from bank balance sheets. So, tell me again how this asset management company differs from the “bad bank” concept?

For starters, NAMA will pay banks to transfer loans to the agency, but it will be at a discounted rate to reflect a value closer to the market rate. This effectively rids individual balance sheets of some of the losses but not all – banks will still have to show the difference between the book value and the discounted value paid by NAMA, as a loss. This is a much better prospect than carrying the entire loss and regulators hope that it puts the banks in a strong enough position that they can get back to providing loans to consumers and businesses in the “real” economy.

Authorities are also optimistic that NAMA will pay for itself and the original debtors will not simply be absolved of their obligations at the expense of the taxpayer. NAMA will now be seeking repayment instead of a bank but the hope is, that as a government enterprise, NAMA can provide more flexibility than a retail bank when it comes to repayment schedules.

If Ireland can make NAMA work, the banking system may yet avoid full-out nationalization. Nevertheless, Brian Linehan, Ireland’s Minister for Finance, refuses to rule out further nationalization calling it a “last resort” if necessary. Make no mistake – the pressure is clearly on the government – and the banks – to make NAMA work. The measure of success for NAMA will ultimately be the level to which commercial lending returns and my guess is that if the banks don’t get behind this plan and support it by extending lending levels, the government will have no choice but to take ownership – at least in the short-term – of the nation’s banks.

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