NAMArama

<—— Entry that’s not about economics that way: this one is and it’s exercising my writing muscles, which I’ve been neglecting lately. That said, I did *ahem* get another letter in a national newspaper on Wednesday. Anyway…..

I feel like I want to mention something about the economy. You may or may not be aware of Ireland’s status as completely and utterly economically fucked. We borrowed hugely from around the mid-90s to 2007, taking tons of cheap cash because a) we had a AAA credit rating, b) we’re in the euro, so our currency was always stable from 1999 onwards and c) because we were poor since 1922 and dammit, lottery winners go fucking nuts too. And we invested most of this money in property, a solid investment that never ever loses value, ever. Then something shook, some more things shook, the property market fell over a cliff in early 2008 and last Tuesday came the impact.

Every Irish bank is clinically dead. The only thing keeping them alive is the deposits that haven’t been withdrawn because there hasn’t been a rush on the banks because the government has guaranteed deposits in all banks headquartered in Ireland. That guarantee is all very well, but the banks are still stuck with hundreds, thousands of loans that won’t get paid back. Why? Because so many of them were based on the future value of a property they were borrowed to pay for. If a person took out a €500,000 mortgage but didn’t pay it back because they lost their job, the bank could re-possess the house and probably get €750,000 for it. Ok, they might have made more than €250,000 profit over a 35 year mortgage term, but it was still a profitable exercise.

But what if the property market crashed? Believe it or not, no-one seems to have thought of that. Nobody in authority considered that if all of our banks had most of their current, medium term and long term strategies based on a model where Ireland always has a rising property market and expanding economy, then we were extremely vulnerable if the global economy sneezed.

And of course, the global economy not only sneezed, it also vomited, peed and shat itself simultaenously. And as a result, Ireland has been bleeding out of every orifice for almost two years. The global downturn was always going to hurt a country rated 4th most globalised in the world (just after America) in 2006 and this, combined with our sky-high cost base (Ireland has been a very expensive place to do business since, oh, around the mid 90s funnily enough), gave enough multinationals a good reason to leave and go east. The remnants of our manufacturing industry, such as Dell Computers, decided to relocate to places like Poland and with them went hundreds of suppliers around them. A domino effect saw hundreds of other businesses that relied on income from those who were employed by these multinationals go to the wall – ironically, Dominos Pizza was not one of these and their Tallaght branch remains the most profitable Dominos in the world. Seriously.

Because the economy was in freefall (rapid growth seems to always mean a rapid detraction), the last thing people wanted to do was buy a house. Hell, they weren’t buying cars, computers, TVs, anything for a while there. And if people won’t buy propertly, it’s suddenly not worth that much if no-one will buy it, even with those nice dampeners on the door hinges. So, like a tsunami, the first small wave was followed by a larger, more destructive wave called the property crisis.

The wave was delayed by denial. Estate agents, developers, all those lovely people refused to drop the prices of their properties. Rents remained stubbornly high – if they didn’t, then the whole “rent will pay for the mortgage” thing wouldn’t work. Land was valued as high as it ever was; which was pointless, since there was no market for it. They thought they could sit on the land, leave it undeveloped until things picked up. But the banks kept looking for their money, the money they lent to developers to help them develop a development, develop profits and develop a healthy balance sheet. The money never came because no-one wanted to take the hit; admit to the fact that after spending €200m on a site, you might only make €100m on the apartments you’re building on it. So vast swathes of our cities, towns, even the countryside are bought up for millions by developers and are now worth a fraction of what was paid (read “borrowed”) for them.

The exposure Irish banks have to this is huge. They’re basically crippled with these bad loans, money they gave for property that’s now disappered because the property simply isn’t worth that any more. If the banks were left with all of this bad debt, they’d collapse, sending Ireland into freefall. With a collapsed banking system, our credit rating would plummet, we couldn’t borrow the money we need to run the country while things are bad (currently €27m a day, thanks world!) and, well, I’m not quite sure what happens then. Hades pays a visit, Liam Neeson dresses up as Zeus and they fight or something. Maybe Greece can tell us.

But unlike our Hellenic brothers, our Minister of Finance, Brian Lenihan, decided to do something so crazy that it just might work. Brian and his B-Team have built this Bad Bank called the National Asset Management Agency or NAMA. NAMA is built to be toxic; it will buy all bad debts owed to Irish banks and suffer the burden of them without them having to worry their pretty little heads about it. So despite causing the whole fucking mess in the first place by carrying out the most irresponsible lending the world has ever seen, Irish banks will escape relatively unscathed. They’re being part-nationalised and pumped with money, with the idea being that they must lend folk some of that money instead of hoarding it like the deranged toddlers they’ve been since 2008. And with increased lending will come increased investment, increased employment, increased economy and the road to recovery. And everyone lives happily ever after.

Oh wait, no. Because NAMA is about the biggest bet a government could ever have on its own country. NAMA has spent €47bn buying loans worth, theoretically, €88bn. The difference between the €88bn and the €47bn is what the assets were worth when the money was lent and what it’s now worth at today’s prices, aka the “haircut” of 47%. The idea with NAMA is that those who owe this money will repay it over the original term to NAMA. So if you borrowed €400m from AIB in 2003 to buy property and agreed to pay it back over 30 years, you will pay back whatever you still owe on that loan over the next 23 years to NAMA. Provided you can still keep up the repayments and don’t, I dunno, fly off to the Cayman Islands and never come back. Because if you do, NAMA will repossess your property and sell it for….eh…..anyone want to buy it? No? How about for €300m? No? Well hopefully they’ll at least 53% of that €400m, because if they don’t, that’s a net loss to the taxpayer. Oh yeah, the Irish taxpayer is paying for ALL of this. As well as the usual schools, hospitals, welfare and infrastructure stuff.

So with the government trying to keep the country running while getting less money from less people in work, spending more on social welfare because of less people in work AND having to spend more money (that we have to borrow at a higher ratebecause our credit rating is already down from AAA to AA) than they’ve ever had to spend on our foaming-at-the-mouth banking system, things are getting pretty tight here. Not that you’d immediately notice; the streets of Dublin are still busy, you still have to queue in some shops, no-one is throwing petrol bombs at police or anything. I always wonder what tourists who’ve heard we’re in trouble expect to see; soup kitchens opened in burnt-out former branches of Starbucks, Medicins sans Frontieres doctors giving vaccinations to children in tents erected beside Trinity College, disillusioned citizens wandering in rags. It’s not like that – that only happens on Saturday nights. But there’s enough “To Let” signs, enough closed up shopfronts, little notices citing “unforeseen circumstances” to know something’s up.

Then there’s the public sector. It only stands to reason in an open, capitalist, free economy that if you have a job in a company and you have a set wage, that wage could decrease or you could be made redundant if that company’s income decreases. Even in a communist country, you have to cut your coat according to your cloth. Yet our public sector, who think that they work for a company with a bottomless pit of cash called “The Government”, are outraged at the very thought of having to work for less money (even in a country with deflation, where goods and services are costing less every month). They march, protest, “work to rule” (doing only what their job description says) and even strike. A little bit; wouldn’t want to lose out on that lovely moolah now, would we? Despite thousands of people taking pay freezes, pay cuts or a cut in their hours, our wonderful public sector – population: 320,000, the second biggest city in the country if they could all be rounded-up – thinks that the rules don’t apply to them. Threats of all-out strikes, “go-slows” that stopped passports from being produced last week, name-calling and all-out throwing-toys-out-of-the-pram tantrums could be the start or end of it, but one thing’s for sure; they’re not helping. Solidarity is the only way through all of this; as much as I don’t care for the party that’s in government right now, they’re the ones that caused it, they’re the ones who will make all the tough decisions and they’re the ones that will be anihilated at the 2012 election, hopefully just as things start to pick up again.

We were not ready for this shitstorm; NAMA is Plan B and it’s the only Plan B.

Put bluntly, Brian and his B-Team hope that NAMA will only see 20% of the loans default i.e. not get paid back. And if they get 80% of the €88bn back, along with interest, then Ireland will have actually profited from all this bullshit. Brian can stand back with a cigar, turn to whoever’s listening and proclaim how he “loves when a plan comes together”.

If he’s still alive. Because in a final twist, Brian has life-threatening pancreatic cancer and is undergoing some fairly aggressive chemo by all accounts. And he’s trying to put out the biggest fire Ireland has ever seen. So good luck to all of us; we’re going to need it.

Joe