Rory Hearne: The Minister for Housing, Simon Coveney, indicated yesterday that he is not going to introduce rent regulation/certainty as it might deter the ‘supply’ of private rental accommodation. This shows that it is the new Irish landlords – the wealthy global real estate funds – that are influencing housing policy and not the needs of the hundreds of thousands of tenants facing spiraling rents and evictions.
Showing posts with label NAMA. Show all posts
Showing posts with label NAMA. Show all posts
Friday, 11 November 2016
Thursday, 15 July 2010
Dezoning land, NAMA and adding locational value
Nat O'Connor: It was reported today that "the 40,000 hectares of land zoned for residential development across the country will be reduced to 12,000 hectares over six years" (Irish Times). The Irish Independent's spin on the story was that "The move to dezone 28,000 hectares across the country will hit thousands of developers and landowners who bought land at the height of the boom. They now face the prospect of owning worthless land banks on which hefty bank loans were secured and which may never be developed." Is there not a substantial risk that the value of these land assets may be the only security underpinning loans from banks and that these loans, if passed to NAMA, will be nearly worthless?
If this comes to pass, NAMA will have to buy these loans at much more than a 50 per cent discount. But whether NAMA buys them at an incredible discount - or if the loans remain with the banks, and NAMA's business plan seems to suggest that they won't take on any old bad debt from the banks - they are going to even further weaken the bank's balance sheets, leading inevitably to further recapitalisation from the public purse.
In fairness, the decision to dezone is probably a wise rationalisation of the situation. It clarifies the real medium-term potential (say next twenty years) for most of these sites to be built on. That will help land valuation. By the by, it will also lower the liability of these landowners to land value tax.
Ciarán Cuffe, in announcing the measure, said "The provisions in the new legislation are designed to address this excess to deliver more compact, walkable and integrated communities with the necessary infrastructure and services." This is a good aspiration, and it reinforces the long-standing call for good integrated planning so that housing is well-knitted into nearby public transport, amenities, commerces, etc. And conversely, not built in an isolated field with no such links, which is too often the case for many new developments. Yet that is where this aspiration does not address the need to integrate existing isolated housing where people now live (and with negative equity may live for decades to come), which are too often car-dependent and isolated from shops and amenities.
The point has been made before, but it is worth repeating, that locational value - nearness to transport, employment, schools, shops, etc - is the central way in which land value and housing value will increase over time. It would make sense for the state to engage in a process of adding value to many isolated or half-occupied estates and apartment blocks, by ensuring that the local authority development plans explicitly seek to add locational value in order to integrate isolated housing. The Planning and Development Bill, now passed by the Seanad, does not to my knowledge do this. But local authority plans could still plan this in - if there was a pool of capital available.
Simple example: If NAMA pays €1 billion for several estates of housing, with an average unit price of €100,000 due to poor locational value, then it may or may not be able to sell them and break even for the taxpayer. The downside is that the buyers (or future renters) are likely to be living in circumstances that differ greatly from the stated integrated-into-a-locality policy aim. This in turn will decrease their chances of employment, quality of life, etc.
But if the state took those houses and spend €X million to add locational value (by building a school, better roads, shops, a playground, broadband and/or whatever else) and then sold them for a higher price each, this higher price could pay for the money spent in adding that locational value.
Therefore, in simple terms, if you can add a total of €X million to the price of a set of houses, then €X million is the kind of money that should be invested in making these houses better before selling them. As an externality, people with construction skills (who we have plenty of) would be employed for a time and the final occupants of those homes would have better quality of life and better employment prospects. And of course, the housing market as a whole would be strengthened, which will ease negative equity. It makes no difference to the state if NAMA buys the units for €1 billion and sells them for €1 billion, or if NAMA buys them for €1 billion, the local authorities spend say €250 million and the houses are sold for €1.25 billion. Yet it makes all the difference to those employed and to those who will live there for years!
It should be possible to do a study of the property market that can identify the X factor, that is, the housing price difference between areas which have high locational value and those with low locational value. The large amount of vacant property should provide an adequate sample to make actually quite good estimates of the difference. And since NAMA could have a large portfolio of property, it makes sense for a national plan to add value to it. There is a risk that NAMA will simply be unable to sell housing, except at a loss, due to the combined effect of poor locational value, unemployment and emigration on its portfolio of assets. And because the NAMA plan explicitly states that it won't hoard housing, it can't spend years waiting for property prices to rise again.
To avoid EU rules on direct state competition with the private sector, there could be open tendering for any construction projects associated with adding locational value.
The key assumption is that people seeking to buy would be willing and able to pay more for housing with higher locational value. This requires them to be offered affordable and responsible mortgages. But given that people are likely to be much less 'property ladder'-oriented now, and more likely to buy in a place where they may live for ten or twenty years, it seems reasonable to expect that they would indeed be willing to pay more for higher locational value. So that's where money can be found to improve the locational value of Ireland's stock of vacant housing (much of which will pass through NAMA) and also to provide a much needed boost to employment, and soften the blow for thousands laid off from construction.
If this comes to pass, NAMA will have to buy these loans at much more than a 50 per cent discount. But whether NAMA buys them at an incredible discount - or if the loans remain with the banks, and NAMA's business plan seems to suggest that they won't take on any old bad debt from the banks - they are going to even further weaken the bank's balance sheets, leading inevitably to further recapitalisation from the public purse.
In fairness, the decision to dezone is probably a wise rationalisation of the situation. It clarifies the real medium-term potential (say next twenty years) for most of these sites to be built on. That will help land valuation. By the by, it will also lower the liability of these landowners to land value tax.
Ciarán Cuffe, in announcing the measure, said "The provisions in the new legislation are designed to address this excess to deliver more compact, walkable and integrated communities with the necessary infrastructure and services." This is a good aspiration, and it reinforces the long-standing call for good integrated planning so that housing is well-knitted into nearby public transport, amenities, commerces, etc. And conversely, not built in an isolated field with no such links, which is too often the case for many new developments. Yet that is where this aspiration does not address the need to integrate existing isolated housing where people now live (and with negative equity may live for decades to come), which are too often car-dependent and isolated from shops and amenities.
The point has been made before, but it is worth repeating, that locational value - nearness to transport, employment, schools, shops, etc - is the central way in which land value and housing value will increase over time. It would make sense for the state to engage in a process of adding value to many isolated or half-occupied estates and apartment blocks, by ensuring that the local authority development plans explicitly seek to add locational value in order to integrate isolated housing. The Planning and Development Bill, now passed by the Seanad, does not to my knowledge do this. But local authority plans could still plan this in - if there was a pool of capital available.
Simple example: If NAMA pays €1 billion for several estates of housing, with an average unit price of €100,000 due to poor locational value, then it may or may not be able to sell them and break even for the taxpayer. The downside is that the buyers (or future renters) are likely to be living in circumstances that differ greatly from the stated integrated-into-a-locality policy aim. This in turn will decrease their chances of employment, quality of life, etc.
But if the state took those houses and spend €X million to add locational value (by building a school, better roads, shops, a playground, broadband and/or whatever else) and then sold them for a higher price each, this higher price could pay for the money spent in adding that locational value.
Therefore, in simple terms, if you can add a total of €X million to the price of a set of houses, then €X million is the kind of money that should be invested in making these houses better before selling them. As an externality, people with construction skills (who we have plenty of) would be employed for a time and the final occupants of those homes would have better quality of life and better employment prospects. And of course, the housing market as a whole would be strengthened, which will ease negative equity. It makes no difference to the state if NAMA buys the units for €1 billion and sells them for €1 billion, or if NAMA buys them for €1 billion, the local authorities spend say €250 million and the houses are sold for €1.25 billion. Yet it makes all the difference to those employed and to those who will live there for years!
It should be possible to do a study of the property market that can identify the X factor, that is, the housing price difference between areas which have high locational value and those with low locational value. The large amount of vacant property should provide an adequate sample to make actually quite good estimates of the difference. And since NAMA could have a large portfolio of property, it makes sense for a national plan to add value to it. There is a risk that NAMA will simply be unable to sell housing, except at a loss, due to the combined effect of poor locational value, unemployment and emigration on its portfolio of assets. And because the NAMA plan explicitly states that it won't hoard housing, it can't spend years waiting for property prices to rise again.
To avoid EU rules on direct state competition with the private sector, there could be open tendering for any construction projects associated with adding locational value.
The key assumption is that people seeking to buy would be willing and able to pay more for housing with higher locational value. This requires them to be offered affordable and responsible mortgages. But given that people are likely to be much less 'property ladder'-oriented now, and more likely to buy in a place where they may live for ten or twenty years, it seems reasonable to expect that they would indeed be willing to pay more for higher locational value. So that's where money can be found to improve the locational value of Ireland's stock of vacant housing (much of which will pass through NAMA) and also to provide a much needed boost to employment, and soften the blow for thousands laid off from construction.
Wednesday, 31 March 2010
Banks: elsewhere on the web ....
Over at Ireland after Nama, Declan Curran asks some pertinent questions. On Irish Economy, Karl Whelan takes a look at The Good, the Bad and the Ugly. Meanwhile, Ronan Lyons points out that the first tranche of loans may not be representative, and that subsequent tranches may show significantly larger discounts.
The 'I'm really getting tired of this nonsense' guide to bond yield trends
Michael Taft: There are others who will discuss intelligently the fall-out from Ireland’s financial Black Hole Day (Sli Eile, Stephen Kinsella and Nat O’Connor on this blog for instance). One thing that struck me during the Finance Minister’s robust, if economically-challenged, interview on Prime Time was his contention that things were, like, totally cool. Why? Since he announced the massive give-away, bond yields hadn’t moved. Wow. He made his announcement at 4:30 pm and by 10:00 pm bond yields hadn’t moved. This proved that not only that the international markets were not ‘concerned’ with our financial black hole, they were positively chill (or they just go to bed early).
One could really get tired of this. There’s an eerie anthropomorphic quality to discussions on bond markets. Apparently, these markets can ‘feel’, ‘be happy’, ‘become angry’, ‘contemplate’, etc. and on and on. The trend of commentary usually goes like this: ‘the markets will be concerned if the Government doesn’t get tough on trade unionists, the poor, public spending and businesses in debt’. And when the Government does do tough guy stuff, the bond markets ‘approve’ and so, are at peace.
All this comes from the sound-bite school of deep, thoughtful analysis. Tracking bond yields can tell us many things – and it’s amazing that what it usually tells us is what we want it to tell us: vide the Finance Minister last night. So in that spirit I have constructed my own way of explaining bond yield trends. I have used the gross redemption yields for 10-year plus bonds on the last day of the month, sourced from ISEQ (one of many ways to track borrowing costs). This is what the ‘markets’ are telling me.
APRIL 2008: We are still innocent. The ESRI has yet to discover the recession and predict 3.1 percent growth for 2009. There is talk of property prices but we are assured it will be a soft, gentle landing. AIB is trading at €13.25. In another country baseball season is starting and little boys will be playing well into the bright summer evenings.
Bond Yield: 4.40
SEPTEMBER 2008: The boys of summer are still playing baseball but the financial dogs in the street are muttering something about Irish banks and insolvencies. The Sunday Independent declares that if anything goes wrong, whatever that might be, it will of course be the fault of trade unions. Bank Guarantee announced at the end of the month. Markets don’t have time to react before month’s end because they go to bed early.
Bond Yield: 4.60
OCTOBER 2008: Bankers say everything is fine and they don’t need equity; the markets get worried. AIB trades at €5.00 but no one is fired. Bringing forward the Budget doesn’t help either – especially this budget.
Bond Yield: 4.84
DECEMBER 2009: Markets get less jittery. All that hysterics about the state being exposed to hundred of billions of bank Euros fade away. ISME calls for the suppression of trade unions. Their competitors, the Small Firms Association, call ISME weak on the issue of trade unions.
Bond Yield: 4.47
JANUARY 2009: Everything goes haywire. Markets up in arms. Is it because Anglo-Irish is nationalised or because the Government, only a few days before, was going to pump billions in it because they believed it was still viable? The markets unsure whether the Government was colluding in a tissue of lies and deceit or are just plain idiots. Live Register experiences biggest jump in two decades.
Bond Yield: 5.54
FEBRUARY 2009: The Government goes macho. They kick the unions out of Government buildings in the early morning (and don’t even call them a cab). The Finance Minister announces a pension levy on public sector workers and cuts in the number of special need teachers. Pumped abs and testosterone everywhere. Commentators note that even the weather has improved. The markets, however . . .
Bond Yield: 5.57
MARCH 2009: The Tánaiste declares the Government has public finances under control. No one, not even the omnipotent markets, knows what to make of this.
Bond Yield: 5.45
APRIL 2009: Just to prove the Tánaiste was right, the Government introduces an emergency budget. The markets don’t understand – consumer spending is collapsing, businesses reliant on domestic sales are collapsing; and the Government takes even more money out of people’s pockets. There’s counter-intuitive and there’s counter-intuitive; and then there’s Fianna Fail.
Bond Yield: 5.28
JUNE 2009: The markets reconsider the Government’s emergency budget and their deflationary strategy of cutting €11 billion out of an already debilitated economy over the next four years.
Bond Yield: 5.84
AUGUST 2009: For months the three major credit rating agencies have been downgrading Irish Government debt and are threatening more. Commentators are horrified and claim we’ll never be able to borrow again ever, the Sunday Independent blames trades unions, employers demand the minimum wage be cut (though no one can figure out how this will get cheaper money). The markets, however, prove they have a sense of humour.
Bond Yield: 4.68
THE AUTUMN RUN-UP TO THE BUDGET - NOVEMBER 2009: Everyone is giddy. If the Government keeps their promise to implement a puppy-crunching, Bruce Lee, in-your-face, take-no-prisoners budget, the markets will smile and investors will actually pay us to borrow from them. The Taoiseach promises blood, sweat and bankruptcies, the Tánaiste claims that what ever makes us redundant only makes us stronger; the Minister for Health (sic) goes one better and threatens IMF tanks in every town square in the country if we don’t take the pain.
Bond Yield: 5.16
DECEMBER 2010: The Government introduces a puppy-crunching, Bruce Lee, in-your-face, take-no-prisoners budget.
Bond Yield: 5.18
[For a few weeks everyone’s attention is on Greece and those irrational Greek workers striking and marching in the streets because they don’t want to be the fall-guys and fall-gals for maintaining a strong Euro, Germany’s current account surplus and finance capital’s hopes for a return to Alpha status.]
MARCH 30th 4:30 – 10: 00 pm: The Minister declares markets are totally cool with him shovelling up to €20 billion in Anglo-Irish (proves what shrewd market players the Cabinet are), that the economy has turned the corner, unemployment is stabilising and we’ll return to growth this year. Recession? What recession? The only recession is in your mind, dude.
Bond Yield: Moved not one cent according to the Minister.
* * *
All that – all that courageous action the Government has taken that has so impressed the markets – and bond yields are worse than when we started on this dismal path. Of course, there will be those who will claim that if the Government didn’t take courageous action, borrowing costs would have been worse. If so, then why is it high bond yields got worse every time they did?
That’s one way of looking at all this. For another perspective have a read of Michael Burke’s take on borrowing costs and the Government’s deflationary policies. You might have your own perspective. If so, go on to the Irish Stock Exchange website and build your own story.
But, please, just don’t make the markets ‘nervous’.
One could really get tired of this. There’s an eerie anthropomorphic quality to discussions on bond markets. Apparently, these markets can ‘feel’, ‘be happy’, ‘become angry’, ‘contemplate’, etc. and on and on. The trend of commentary usually goes like this: ‘the markets will be concerned if the Government doesn’t get tough on trade unionists, the poor, public spending and businesses in debt’. And when the Government does do tough guy stuff, the bond markets ‘approve’ and so, are at peace.
All this comes from the sound-bite school of deep, thoughtful analysis. Tracking bond yields can tell us many things – and it’s amazing that what it usually tells us is what we want it to tell us: vide the Finance Minister last night. So in that spirit I have constructed my own way of explaining bond yield trends. I have used the gross redemption yields for 10-year plus bonds on the last day of the month, sourced from ISEQ (one of many ways to track borrowing costs). This is what the ‘markets’ are telling me.
APRIL 2008: We are still innocent. The ESRI has yet to discover the recession and predict 3.1 percent growth for 2009. There is talk of property prices but we are assured it will be a soft, gentle landing. AIB is trading at €13.25. In another country baseball season is starting and little boys will be playing well into the bright summer evenings.
Bond Yield: 4.40
SEPTEMBER 2008: The boys of summer are still playing baseball but the financial dogs in the street are muttering something about Irish banks and insolvencies. The Sunday Independent declares that if anything goes wrong, whatever that might be, it will of course be the fault of trade unions. Bank Guarantee announced at the end of the month. Markets don’t have time to react before month’s end because they go to bed early.
Bond Yield: 4.60
OCTOBER 2008: Bankers say everything is fine and they don’t need equity; the markets get worried. AIB trades at €5.00 but no one is fired. Bringing forward the Budget doesn’t help either – especially this budget.
Bond Yield: 4.84
DECEMBER 2009: Markets get less jittery. All that hysterics about the state being exposed to hundred of billions of bank Euros fade away. ISME calls for the suppression of trade unions. Their competitors, the Small Firms Association, call ISME weak on the issue of trade unions.
Bond Yield: 4.47
JANUARY 2009: Everything goes haywire. Markets up in arms. Is it because Anglo-Irish is nationalised or because the Government, only a few days before, was going to pump billions in it because they believed it was still viable? The markets unsure whether the Government was colluding in a tissue of lies and deceit or are just plain idiots. Live Register experiences biggest jump in two decades.
Bond Yield: 5.54
FEBRUARY 2009: The Government goes macho. They kick the unions out of Government buildings in the early morning (and don’t even call them a cab). The Finance Minister announces a pension levy on public sector workers and cuts in the number of special need teachers. Pumped abs and testosterone everywhere. Commentators note that even the weather has improved. The markets, however . . .
Bond Yield: 5.57
MARCH 2009: The Tánaiste declares the Government has public finances under control. No one, not even the omnipotent markets, knows what to make of this.
Bond Yield: 5.45
APRIL 2009: Just to prove the Tánaiste was right, the Government introduces an emergency budget. The markets don’t understand – consumer spending is collapsing, businesses reliant on domestic sales are collapsing; and the Government takes even more money out of people’s pockets. There’s counter-intuitive and there’s counter-intuitive; and then there’s Fianna Fail.
Bond Yield: 5.28
JUNE 2009: The markets reconsider the Government’s emergency budget and their deflationary strategy of cutting €11 billion out of an already debilitated economy over the next four years.
Bond Yield: 5.84
AUGUST 2009: For months the three major credit rating agencies have been downgrading Irish Government debt and are threatening more. Commentators are horrified and claim we’ll never be able to borrow again ever, the Sunday Independent blames trades unions, employers demand the minimum wage be cut (though no one can figure out how this will get cheaper money). The markets, however, prove they have a sense of humour.
Bond Yield: 4.68
THE AUTUMN RUN-UP TO THE BUDGET - NOVEMBER 2009: Everyone is giddy. If the Government keeps their promise to implement a puppy-crunching, Bruce Lee, in-your-face, take-no-prisoners budget, the markets will smile and investors will actually pay us to borrow from them. The Taoiseach promises blood, sweat and bankruptcies, the Tánaiste claims that what ever makes us redundant only makes us stronger; the Minister for Health (sic) goes one better and threatens IMF tanks in every town square in the country if we don’t take the pain.
Bond Yield: 5.16
DECEMBER 2010: The Government introduces a puppy-crunching, Bruce Lee, in-your-face, take-no-prisoners budget.
Bond Yield: 5.18
[For a few weeks everyone’s attention is on Greece and those irrational Greek workers striking and marching in the streets because they don’t want to be the fall-guys and fall-gals for maintaining a strong Euro, Germany’s current account surplus and finance capital’s hopes for a return to Alpha status.]
MARCH 30th 4:30 – 10: 00 pm: The Minister declares markets are totally cool with him shovelling up to €20 billion in Anglo-Irish (proves what shrewd market players the Cabinet are), that the economy has turned the corner, unemployment is stabilising and we’ll return to growth this year. Recession? What recession? The only recession is in your mind, dude.
Bond Yield: Moved not one cent according to the Minister.
* * *
All that – all that courageous action the Government has taken that has so impressed the markets – and bond yields are worse than when we started on this dismal path. Of course, there will be those who will claim that if the Government didn’t take courageous action, borrowing costs would have been worse. If so, then why is it high bond yields got worse every time they did?
That’s one way of looking at all this. For another perspective have a read of Michael Burke’s take on borrowing costs and the Government’s deflationary policies. You might have your own perspective. If so, go on to the Irish Stock Exchange website and build your own story.
But, please, just don’t make the markets ‘nervous’.
How much are the bank bailouts going to cost us?
Nat O'Connor: There is a lack of clarity about just how much the bank bailout will cost ordinary people. But based on recent news, the estimated costs are huge.
The Irish Independent states that "Every man, woman and child in the State will have to pay an average of €2,000 every year just to service interest payments on borrowings to pay for the bank bailout, estimated to cost €40bn."
In fairness, it's not clear that we have enough information to know that yet. If the banks raise their own capital we won't need to borrow as much. Also, if we part-recapitalise the banks out of the National Pension Reserve Fund (which is what we did before) we will borrow less again. But let's tease out the scale of what borrowing €40 billion would mean.
Unfortunately, not every man, woman and child in Ireland has an income. So will paying the bill fall on the shoulders of Ireland's 1.6 million households, rather than its 4.5 million people? The costs then comes out at roughly €5,600 per year per household. But with state pensioners and other people living on social welfare on incomes of around €12,000, are we talking about halving their incomes and plunging hundreds of thousands of people into destitution?
Alternatively, we could look at the 1.9 million people in employment, who would have to take on an average of €4,600 each (with couples, where both partners are employed, taking on €9,200).
Average earnings for someone in employment in Ireland in 2009 were around €36,300 per year (CSO). So, for example, a single person on this income, already on c. €29,500 after tax, will see their final income fall to around €24,900. (Of course those on lower incomes might pay less, and those on higher incomes might pay more... this is just the average cost applied to the average income).
The cost to those in employment is likely to be lessened by further cuts in public expenditure (social welfare cuts, cuts to pensions, cuts to public capital expenditure, cuts to public services of all kinds, etc). Except that these cuts will also reduce quality of life, health, education, and increase households' costs to fill the gap created by the absence of public services.
And this is just to pay the interest on the loans to bail out the banks.
All the above assumes that NAMA will work and we will only have to pay the interest on the loans for a period of years. If NAMA makes a loss, or further bank bailouts are required, the burden of paying for all this will increase.
If that wasn't bad enough, some people will be further affected by mortgage interest increases. The Belfast Telegraph suggests that AIB "will respond to its latest bailout by raising mortgage rates by a further 1.5% this year." That's on top of this week's 0.5 per cent increase. Assuming the other banks follow suit, that will increase pressure on tens of thousands of households.
Not every household is affected by this double squeeze, but it is hard to see how households will be able to afford to pay another couple of thousand extra per year on their mortgage repayments, alongside bearing the tax increases to pay the interest on the loans to bail out the banks.
It is possible that we could see a major wave of mortgage default and repossession, which would trigger a further crisis in the banks, and a need for further recapitalisation. Those who don't default are likely to be paying way more than they can comfortably afford to keep their homes; all to avoid the nightmare of selling their homes at a low price, while still owing the bank the balance of their original (massive) mortgage loans.
In a year or so, the State could own all or most of the banks, but the citizens who own the State will be paying increased charges to the banks as customers at the same time as paying taxes for the loans to own them. The burden of paying the interest on the loans will all but rule out any productive investment in better infrastructure, better education, etc. Most of our potential for investment will be tied up for years in paying for the mistakes made by past governments.
There is a need for much more accurate information to be made available on exactly how the Government plans on paying for the banks and at what point it would be cheaper to let some of them go bust. We need to know exactly how much households will have to pay and what will be the opportunity cost in cuts to public services and the loss of a generation's ability to invest in a better future. At present we can only speculate. But based on the figures currently in the news, it's a perverse and gloomy situation and we haven't gotten to the bottom of it yet.
The Irish Independent states that "Every man, woman and child in the State will have to pay an average of €2,000 every year just to service interest payments on borrowings to pay for the bank bailout, estimated to cost €40bn."
In fairness, it's not clear that we have enough information to know that yet. If the banks raise their own capital we won't need to borrow as much. Also, if we part-recapitalise the banks out of the National Pension Reserve Fund (which is what we did before) we will borrow less again. But let's tease out the scale of what borrowing €40 billion would mean.
Unfortunately, not every man, woman and child in Ireland has an income. So will paying the bill fall on the shoulders of Ireland's 1.6 million households, rather than its 4.5 million people? The costs then comes out at roughly €5,600 per year per household. But with state pensioners and other people living on social welfare on incomes of around €12,000, are we talking about halving their incomes and plunging hundreds of thousands of people into destitution?
Alternatively, we could look at the 1.9 million people in employment, who would have to take on an average of €4,600 each (with couples, where both partners are employed, taking on €9,200).
Average earnings for someone in employment in Ireland in 2009 were around €36,300 per year (CSO). So, for example, a single person on this income, already on c. €29,500 after tax, will see their final income fall to around €24,900. (Of course those on lower incomes might pay less, and those on higher incomes might pay more... this is just the average cost applied to the average income).
The cost to those in employment is likely to be lessened by further cuts in public expenditure (social welfare cuts, cuts to pensions, cuts to public capital expenditure, cuts to public services of all kinds, etc). Except that these cuts will also reduce quality of life, health, education, and increase households' costs to fill the gap created by the absence of public services.
And this is just to pay the interest on the loans to bail out the banks.
All the above assumes that NAMA will work and we will only have to pay the interest on the loans for a period of years. If NAMA makes a loss, or further bank bailouts are required, the burden of paying for all this will increase.
If that wasn't bad enough, some people will be further affected by mortgage interest increases. The Belfast Telegraph suggests that AIB "will respond to its latest bailout by raising mortgage rates by a further 1.5% this year." That's on top of this week's 0.5 per cent increase. Assuming the other banks follow suit, that will increase pressure on tens of thousands of households.
Not every household is affected by this double squeeze, but it is hard to see how households will be able to afford to pay another couple of thousand extra per year on their mortgage repayments, alongside bearing the tax increases to pay the interest on the loans to bail out the banks.
It is possible that we could see a major wave of mortgage default and repossession, which would trigger a further crisis in the banks, and a need for further recapitalisation. Those who don't default are likely to be paying way more than they can comfortably afford to keep their homes; all to avoid the nightmare of selling their homes at a low price, while still owing the bank the balance of their original (massive) mortgage loans.
In a year or so, the State could own all or most of the banks, but the citizens who own the State will be paying increased charges to the banks as customers at the same time as paying taxes for the loans to own them. The burden of paying the interest on the loans will all but rule out any productive investment in better infrastructure, better education, etc. Most of our potential for investment will be tied up for years in paying for the mistakes made by past governments.
There is a need for much more accurate information to be made available on exactly how the Government plans on paying for the banks and at what point it would be cheaper to let some of them go bust. We need to know exactly how much households will have to pay and what will be the opportunity cost in cuts to public services and the loss of a generation's ability to invest in a better future. At present we can only speculate. But based on the figures currently in the news, it's a perverse and gloomy situation and we haven't gotten to the bottom of it yet.
Tuesday, 30 March 2010
Groundhog Day
Stephen Kinsella: Super Tuesday has been and gone. Even those of us who study Irish public policy and the Irish economy on a daily basis were taken aback by the scale of the wealth transfers from state to private banks. What does it all mean? I’m a professional economist folks–don’t try this at home.
As I mentioned on Drivetime this evening, the injection of capital, combined with the government guarantee and NAMA, is supposed to heal banks’ balance sheets enough to get them into a position where they can borrow cheaply from abroad, and so resume lending again.
Finally, notice the precise imprecision: promissory notes are being issued for several billions, but spread out over ‘10 or 15 years’. Surely we can do better? Not to worry though, we’ll have another crack at it, when groundhog day rolls around again.
As I mentioned on Drivetime this evening, the injection of capital, combined with the government guarantee and NAMA, is supposed to heal banks’ balance sheets enough to get them into a position where they can borrow cheaply from abroad, and so resume lending again.
My opinion is that this increase in lending won’t happen, because canny investors know that residential loan defaults are on the way. We’ll have a groundhog day. This is not the one big moment to sort out our banking sector. This is a stage in a process, and nothing more. We’ll see the outright nationalisation of AIB by the end of 2010.
NAMA is getting going with its big 10 debtors, transferring 16 billion euros worth of loans in the next few weeks, representing perhaps 20% of the overall loans to be transferred by the end of the year. In particular, Anglo transfers €10bn at 50% discount, AIB transfers €3.29bn (43%), BoI transfers €1.93bn (35%), Nationwide transfers €670m (58%), and EBS transfers €140m (37%). Overall, the haircut is 47%. We need to be careful with that 47% discount number (or ‘haircut’) everyone is talking about. As usual, the bigger haircut, the greater the hole to fill in balance sheets to be filled by taxpayer’s money. While it might be the weighted average of the discounts being applied to each bank as the Minister says, we can’t back out the prices NAMA is going to pay for the loans in, say, AIB or Anglo. Update: Karl Whelan has more on this issue.
Notice also the rhetorical shift. We knew after guaranteeing the liabilities of the banks that a bad bank or asset management vehicle like NAMA was necessary, but also a further injection of capital and perhaps even full scale nationalisation. We were told NAMA was the only game in town, and all other options were not to be considered. Those who argued for nationalisation were derided or ignored. Now it looks highly likely that at least AIB, Anglo, INM, and EBS will be nationalised by the end of 2010, with the state taking a large piece of BoI as well.
Finally, notice the precise imprecision: promissory notes are being issued for several billions, but spread out over ‘10 or 15 years’. Surely we can do better? Not to worry though, we’ll have another crack at it, when groundhog day rolls around again.
Moral overload?
Slí Eile: No sooner was the ink dry on the Public Service Agreement (2010-2014) than the next news story broke on - NAMA. It just never dies down. We have now moved from dealing in billions to tens of billions. In Weimar Republic style numbers inflation we are moving into funny money territory. Except it is not funny for anyone. It is staggering. The figures dwarf any possible savings in public sector pay bill by a large multiple that the financial implications of the new deal on the public service (if is passed by union members) pale into insignificance. The negotiators deserve credit for their efforts. But, there is one snag - its paragraph 28 on page 9 - the very last sentence in the main document. It reads:
Worryingly, the Labour Party have pointed out (Strategic Investment Bank) that:
The implementation of this Agreement is subject to no currently unforeseen budgetary deterioration.O dear. I think we might have just had an unforeseen budgetary deterioration over the six o clock news this evening. Even Minister Lenihan admits that this has serious implications for taxpayers (contrary to the McCarthyite dictum that NAMA and the fiscal crisis have nothing to do with each other). NAMA has everything to do with the crisis because it is going to magnify the mountain of debt, contraction and cost-cutting imposed by a general slump. With GNP falling at an annual rate of over 12%, tax receipts under-shooting for most months there is every prospect of an early budget or an early election or an early bank collapse or all three. Either we keep on feeding the junkie called Anglo or we allow the junkie to die. Pretty stark. But, the problem right now for Government is whether it can deliver on all of its promises to:
- not cut public sector pay before 2014
- reduce the General Government Deficit to 3% of GDP by 2014
- keep the Anglo junkie fed with €10bn every few months (does anyone believe that another shot will not be demanded - we are in free fall)
- and keep the economy from contracting by another 10-12% this year (the forecast for a decline of 3% but that remains to be seen).
Worryingly, the Labour Party have pointed out (Strategic Investment Bank) that:
At the same time, Ireland’s fiscal position and the restrictions imposed by theWhere does that leave us if people are saying that we are under siege on all sides and to such an extent that we cannot invest our way out of this crisis along with other policy measures?
Stability and Growth Pact (SGP) represent a major constraint. There is little prospect that the level of investment necessary to improve our infrastructure can take place in the next decade given the current state of the public finances. And even without the fiscal crisis, the SGP, which includes public capital investment as part of its limit for the budget deficit, would restrict the State from making the necessary investments.
Wednesday, 24 February 2010
Triple Lock - a lifetime of debt
Slí Eile: Writing in today's Irish Independent, economist David McWilliams in his typically lucid way calls a spade a spade (It's time to shout stop - NAMA is grand larceny). First the bank guarantee, then NAMA and now forced nationalisation (on less favourable terms than if the issue was confronted earlier). He writes:
Karl Whelan wrote early last year:
A crucial feature of the nationalisation approach is that it dramatically reduces the risk involved in having to value the bad loans.
The triple lock would solder the people to the banking system in a suffocating embrace forcing us to borrow from tomorrow to pay for yesterday and, in the process, destroy the opportunities of today.Alone of the parties in the Oireachtas, the Labour Party got it right in September 2008 on the guarantee. Labour got it right on nationalisation in March 2009. And they were right on NAMA.
Karl Whelan wrote early last year:
A crucial feature of the nationalisation approach is that it dramatically reduces the risk involved in having to value the bad loans.
Thursday, 4 February 2010
Finance, NTMA and FOI
Nat O'Connor: The Story (freedom of information blog) offer an insight into why the Minster for Finance transfered powers to the NTMA yesterday:
"One thing that stands out like a sore thumb is the fact that unlike the Department of Finance, the NTMA is not subject to the Freedom of Information Act. Indeed the Department have said to me several times of the past few months that my requests for information were being delayed because the Department was so busy with NAMA, and with other FOIs. Now, it seems, much of the decision making will be made in secret anyway."
You can read the original here.
"One thing that stands out like a sore thumb is the fact that unlike the Department of Finance, the NTMA is not subject to the Freedom of Information Act. Indeed the Department have said to me several times of the past few months that my requests for information were being delayed because the Department was so busy with NAMA, and with other FOIs. Now, it seems, much of the decision making will be made in secret anyway."
You can read the original here.
Friday, 22 January 2010
Counting Vacant Houses (And Their Cost)
Nat O'Connor: A lack of reliable information about the housing market contributed to the housing bubble and subsequent crash.
The National Institute for Regional and Spatial Analysis (NIRSA), based in NUI Maynooth, estimates that 302,625 housing units lie vacant. Yet, Michael Finneran TD (Minister for State with responsibility for Housing) is reported as recently telling cabinet that there were 100,000-140,000 empty housing units. And the construction industry claims there are only 40,000.
This level of disparity about the basic facts is madness.
You can read about the NIRSA report in the Irish Times and more details of their calculations in a blog piece by the report's authors (one of whom is NIRSA's Director).
We knew something was going badly wrong in the housing market when supply grew, yet prices also rose enormously. The growth in land prices fuelled this, but in hindsight the lack of public information on the housing market allowed developers to time the drip-fed of new housing units into the market to maximise profits.
Accurate statistics about the number of empty housing units in the country could have helped people calculate realistic house prices before and during the bubble. Such statistics might also have helped planning. Instead, we have now ghost estates where few people want to live.
Like the follies built by poorhouse workers during the famine, it seems that these estates have no real utility and there has been talk of demolishing some of them. I'd like to know more about the arguments for this. Are they so sub-standard? Are they so far removed from good roads and potential jobs? Knocking down some of these estates could also be seen as an attempt to decrease supply in the market and thus bolster house prices across the board.
What is the loss to the State if NAMA accepts some of these estates (even with a discount) in exchange for writing off bad bank debt? If even a small number of them are demolished, than the remaining land value (minus the cost of the demolision and waste disposal) will not be worth whatever bad debt NAMA would write off against them at a 30 per cent discount. Alternatively, the long-term consequences of trying to make some of these estates viable will also involve annual costs to the State. For example, if planned badly (or with inadequate resources) the human and financial costs of turning some of them into social housing ghettos could be high.
Then again, many housing units acquired by NAMA could be an important element in moving thousands of people off the waiting lists. However, if it can be shown that it is better to demolish some of them, it would also be better to plan this rationalisation through a coherent national housing strategy, and for NAMA to be barred from accepting them into State ownership in exchange for bad debt.
Meanwhile, for ordinary workers who are living the consequences of the failure to regulate the housing market, Citizens Information have teamed up with MABS to put the most salient advice on a microsite: keepingyourhome.ie
It is obvious that many families are under serious pressure to keep their homes. Many more will be paying rent and mortgages (for years to come) at rates that are way over the one third of net income threshold for 'affordability'.
Yet, at the same time, there are over 300,000 vacant housing units in Ireland.
The National Institute for Regional and Spatial Analysis (NIRSA), based in NUI Maynooth, estimates that 302,625 housing units lie vacant. Yet, Michael Finneran TD (Minister for State with responsibility for Housing) is reported as recently telling cabinet that there were 100,000-140,000 empty housing units. And the construction industry claims there are only 40,000.
This level of disparity about the basic facts is madness.
You can read about the NIRSA report in the Irish Times and more details of their calculations in a blog piece by the report's authors (one of whom is NIRSA's Director).
We knew something was going badly wrong in the housing market when supply grew, yet prices also rose enormously. The growth in land prices fuelled this, but in hindsight the lack of public information on the housing market allowed developers to time the drip-fed of new housing units into the market to maximise profits.
Accurate statistics about the number of empty housing units in the country could have helped people calculate realistic house prices before and during the bubble. Such statistics might also have helped planning. Instead, we have now ghost estates where few people want to live.
Like the follies built by poorhouse workers during the famine, it seems that these estates have no real utility and there has been talk of demolishing some of them. I'd like to know more about the arguments for this. Are they so sub-standard? Are they so far removed from good roads and potential jobs? Knocking down some of these estates could also be seen as an attempt to decrease supply in the market and thus bolster house prices across the board.
What is the loss to the State if NAMA accepts some of these estates (even with a discount) in exchange for writing off bad bank debt? If even a small number of them are demolished, than the remaining land value (minus the cost of the demolision and waste disposal) will not be worth whatever bad debt NAMA would write off against them at a 30 per cent discount. Alternatively, the long-term consequences of trying to make some of these estates viable will also involve annual costs to the State. For example, if planned badly (or with inadequate resources) the human and financial costs of turning some of them into social housing ghettos could be high.
Then again, many housing units acquired by NAMA could be an important element in moving thousands of people off the waiting lists. However, if it can be shown that it is better to demolish some of them, it would also be better to plan this rationalisation through a coherent national housing strategy, and for NAMA to be barred from accepting them into State ownership in exchange for bad debt.
Meanwhile, for ordinary workers who are living the consequences of the failure to regulate the housing market, Citizens Information have teamed up with MABS to put the most salient advice on a microsite: keepingyourhome.ie
It is obvious that many families are under serious pressure to keep their homes. Many more will be paying rent and mortgages (for years to come) at rates that are way over the one third of net income threshold for 'affordability'.
Yet, at the same time, there are over 300,000 vacant housing units in Ireland.
Thursday, 17 December 2009
NAMA debt
Michael Burke: Leading critics of NAMA argued prior to its inception that it would provide no new credit in the economy. Writing in today's Irish Times, Karl Whelan shows how his prediction and that of many others was entirely correct. This is despite repeated assurances from Ministers that NAMA assets could be used by Irish banks as collateral at the European Central Bank to increase lending. This was another of many recent fictions.
But there may also be another, imminent negative effect arising from the creation of NAMA.
Bond investors are more comfortable lending when there is greater security on their principal. I have argued elsewhere that currently bond investors show a clear preference for lending to governments engaged in reflation,
and that they take fright when there is no clear improvement in the economic and deficit outlook.
It is not necessary to agree with the interpretation of reflation to recognise the simple truth regarding investors' preference for getting their money back. But that begs an awful, €54bn question. If bond market investors take a negative view of NAMA's viability, will they buy the bonds, or, if so, what eye-watering yields might they require to accept the risk? In either event the negative knock-on effects on government debt could be considerable.
In such a scenario, steps to nationalise the banks will be necessary but insufficient to avert a crisis. Any call to nationalise the banks should be with the strict proviso that it must be without compensation to either the failed banks' share or bondholders. Otherwise, taxpayers would be taking on debts which are a huge multiple of €54bn.
But there may also be another, imminent negative effect arising from the creation of NAMA.
Bond investors are more comfortable lending when there is greater security on their principal. I have argued elsewhere that currently bond investors show a clear preference for lending to governments engaged in reflation,
and that they take fright when there is no clear improvement in the economic and deficit outlook.
It is not necessary to agree with the interpretation of reflation to recognise the simple truth regarding investors' preference for getting their money back. But that begs an awful, €54bn question. If bond market investors take a negative view of NAMA's viability, will they buy the bonds, or, if so, what eye-watering yields might they require to accept the risk? In either event the negative knock-on effects on government debt could be considerable.
In such a scenario, steps to nationalise the banks will be necessary but insufficient to avert a crisis. Any call to nationalise the banks should be with the strict proviso that it must be without compensation to either the failed banks' share or bondholders. Otherwise, taxpayers would be taking on debts which are a huge multiple of €54bn.
Thursday, 29 October 2009
Its OK to borrow off-sheet when it comes to NAMA
Slí eile: When it comes to sorting out banking and keeping risk to under 5% for bondholders, there is nothing to beat a bit of creative accounting and re-labelling. The creation of SPV - Special Purpose Vehicle involving a 51% private (big) investor holdings to get around the EU Stability and Growth Pact guidelines is intriguing. We are talking about big money here - over 30% of annual GDP in 2009. I am not complaining except to wonder if this latest wizardry will not give rise to more questions, delays and problems.
In a letter to Eurostat regarding September Maastricht Return, the Department of Finance projected a General Government Balance (GGB) for 2009 of -€19,982 million or -12.0% of GDP, 'which shows a worsening of €1,569 million on the April 2009 forecast deficit of -€18,413 million, or 10.7% of GDP'. In other words, as everyone knows and accepts by now the exchequer is miles off course and the wind of collapsing tax receipts continues to blow the ship north by north west where we are warned of some nasty IMF rocks (although Michael Casey doesn't regard this as the worse thing that could happen).
The Department of Finance acknowledge that the 'principal causes of the dis-improvement in this level of the GGB' includes a further collapse in tax revenue of €2.1 bn
Would anyone in Merrion Street, the ESRI or among academia care to estimate what proportion of this tax shortfall (and rising spending resulting from more unemployment) is a direct consequence of:
pay cuts
collapse in consumer confidence
businesses going to the wall because of lack of credit
How long will the GGB increase or remain at about 12% until the truth emerges? I suspect that some people are thinking to themselves that an international recovery allied to resumed emigration will relieve the pressure and pull us - eventually - out the present impossible bind.
Eventually things will come around - no matter how incompetent and self-defeating fiscal policy is. However, we have choices. If we cut too much and too quickly allied to measures which target low pay and welfare then the recovery will be slower, longer and more painful with pain multiplied for those at the bottom.
A national unemployment emergency should be declared and every initiative, cut or allocation job-proofed. The consequences of a lost generation to unemployment, despair and ill-health are incalculable.
In a letter to Eurostat regarding September Maastricht Return, the Department of Finance projected a General Government Balance (GGB) for 2009 of -€19,982 million or -12.0% of GDP, 'which shows a worsening of €1,569 million on the April 2009 forecast deficit of -€18,413 million, or 10.7% of GDP'. In other words, as everyone knows and accepts by now the exchequer is miles off course and the wind of collapsing tax receipts continues to blow the ship north by north west where we are warned of some nasty IMF rocks (although Michael Casey doesn't regard this as the worse thing that could happen).
The Department of Finance acknowledge that the 'principal causes of the dis-improvement in this level of the GGB' includes a further collapse in tax revenue of €2.1 bn
Would anyone in Merrion Street, the ESRI or among academia care to estimate what proportion of this tax shortfall (and rising spending resulting from more unemployment) is a direct consequence of:
pay cuts
collapse in consumer confidence
businesses going to the wall because of lack of credit
How long will the GGB increase or remain at about 12% until the truth emerges? I suspect that some people are thinking to themselves that an international recovery allied to resumed emigration will relieve the pressure and pull us - eventually - out the present impossible bind.
Eventually things will come around - no matter how incompetent and self-defeating fiscal policy is. However, we have choices. If we cut too much and too quickly allied to measures which target low pay and welfare then the recovery will be slower, longer and more painful with pain multiplied for those at the bottom.
A national unemployment emergency should be declared and every initiative, cut or allocation job-proofed. The consequences of a lost generation to unemployment, despair and ill-health are incalculable.
Wednesday, 28 October 2009
Cash for Crap Houses: Ireland & NAMA
Stephen Kinsella: Ronan Lyons has the story on the idea that NAMA should become a hands-on property management company. Long story short, it is a very bad idea. But you knew that.
Allow me to be very cynical for a moment and, just as a thought experiment, assume NAMA does become such a property management company, because of political and regulatory capture, say. I'd value everyone's comments on this, simply because I'm worried a version of this idea is in the backs of minds of a set of vested interests.
NAMA will obtain houses in targeted regions all over Ireland, specifically the areas where the boom went last, and then bulldoze them, collapsing supply back to, say, 2002 levels. NAMA can also use some of the newly constructed dwellings for social housing and amenity projects.
NAMA can then offer current homeowners a twenty percent rebate for the building of new homes, or a straight cash for crap houses swop, where we upgrade the housing stock for everyone overnight, so someone in an uninsulated bungalow can get a brand-new house for, literally, nothing. NAMA can bulldoze the old house to further restrict supply.
This would help boost the construction and associated industries, create job growth and allow for legions of people to get back on an artificially constructed 'property ladder'.
Someone please tell me I'm wrong about all this. I'm sure I've missed a step somewhere along the way.
Allow me to be very cynical for a moment and, just as a thought experiment, assume NAMA does become such a property management company, because of political and regulatory capture, say. I'd value everyone's comments on this, simply because I'm worried a version of this idea is in the backs of minds of a set of vested interests.
NAMA will obtain houses in targeted regions all over Ireland, specifically the areas where the boom went last, and then bulldoze them, collapsing supply back to, say, 2002 levels. NAMA can also use some of the newly constructed dwellings for social housing and amenity projects.
NAMA can then offer current homeowners a twenty percent rebate for the building of new homes, or a straight cash for crap houses swop, where we upgrade the housing stock for everyone overnight, so someone in an uninsulated bungalow can get a brand-new house for, literally, nothing. NAMA can bulldoze the old house to further restrict supply.
This would help boost the construction and associated industries, create job growth and allow for legions of people to get back on an artificially constructed 'property ladder'.
Someone please tell me I'm wrong about all this. I'm sure I've missed a step somewhere along the way.
Friday, 23 October 2009
Prudence in the Face of the Unknown is Key
Stephen Kinsella: It is almost never correct to sacrifice a present benefit for a doubtful advantage in the future. Ireland's political classes understand this truism at the genetic level. In a world where less and less seems predictable, Ireland faces multiple uncertainties: we cannot afford to splurge on one by neglecting the other.
The coming budget will unhinge whatever remains of social partnership, and may even bring down the Government. The coming wave of mortgage defaults will ensure our banking system remains under extreme pressure and international scrutiny, no matter how well NAMA does or does not perform in cleaning up the balance sheets of recalcitrant banks. It is uncertain how many indigenous Irish businesses will weather the unprecedented economic storm they find themselves in, and what the resulting level of unemployment may be. The slow, but steady, international recovery may leave many parts of Irish society not directly tied to export industries behind. These are short-term concerns.
The negative social consequences of mass unemployment are starting to be felt. The cost to families and communities of increased domestic violence and criminality is incalculable. The security of every family against unnecessary hardship is an invisible social asset on which our culture is dependent: we don’t see this asset until it is gone. These are longer-term concerns.
In the midst of these uncertainties, the government must display prudence in the face of the unknown. Freeing up resources through increased efficiencies in the public sector will take time. One swipe of a pen can reduce incomes of public sector by thousands. A cut in public sector pay is inevitable. An increase in efficiency in the public sector—doing more with less—is not. Which course of action is more prudent, and which more likely to save taxpayers’ money in the long run?
In attempting to be prudent in some areas— fiscal policy, for one—the government may lose the good will of its citizens. By being extremely imprudent, in the cases of NAMA, the stalled reform of the taxation system, the crawl toward accountability, and most of all in a claw back of frontline public services, the government may damage the long run interests of its citizens.
The government has a duty to provide the highest standard of living for its citizens the nation can afford. That appears to be at 2003 levels of income at the moment. Our spending remains at 2009 levels. Prudence dictates the most likely course of action for the government in the coming budget. Actions are not without consequences, however, and a prudent public will do well to remember the choices made on their behalf come election time.
The coming budget will unhinge whatever remains of social partnership, and may even bring down the Government. The coming wave of mortgage defaults will ensure our banking system remains under extreme pressure and international scrutiny, no matter how well NAMA does or does not perform in cleaning up the balance sheets of recalcitrant banks. It is uncertain how many indigenous Irish businesses will weather the unprecedented economic storm they find themselves in, and what the resulting level of unemployment may be. The slow, but steady, international recovery may leave many parts of Irish society not directly tied to export industries behind. These are short-term concerns.
The negative social consequences of mass unemployment are starting to be felt. The cost to families and communities of increased domestic violence and criminality is incalculable. The security of every family against unnecessary hardship is an invisible social asset on which our culture is dependent: we don’t see this asset until it is gone. These are longer-term concerns.
In the midst of these uncertainties, the government must display prudence in the face of the unknown. Freeing up resources through increased efficiencies in the public sector will take time. One swipe of a pen can reduce incomes of public sector by thousands. A cut in public sector pay is inevitable. An increase in efficiency in the public sector—doing more with less—is not. Which course of action is more prudent, and which more likely to save taxpayers’ money in the long run?
In attempting to be prudent in some areas— fiscal policy, for one—the government may lose the good will of its citizens. By being extremely imprudent, in the cases of NAMA, the stalled reform of the taxation system, the crawl toward accountability, and most of all in a claw back of frontline public services, the government may damage the long run interests of its citizens.
The government has a duty to provide the highest standard of living for its citizens the nation can afford. That appears to be at 2003 levels of income at the moment. Our spending remains at 2009 levels. Prudence dictates the most likely course of action for the government in the coming budget. Actions are not without consequences, however, and a prudent public will do well to remember the choices made on their behalf come election time.
Wednesday, 21 October 2009
Will there be a NAMA for personal debt?
Stephen Kinsella: No. The National Asset Management Agency, NAMA, is designed to remove the ‘impaired loans’ generated by excessive lending to the construction industry. NAMA will exchange bonds, backed by the taxpayer, for these impaired loans. The ECB will exchange the bonds for cash, injecting liquidity into the banking system and, so the story goes, getting banks lending again.
I don’t believe that NAMA in its current form will get banks lending again. Even if NAMA’s critics are 100% wrong, and NAMA succeeds brilliantly, bankers know that another set of ‘impaired loans’ are on the way, and so banks won’t lend into the `real’ economy — to businesses and households — at reasonable rates of interest, because they expect that householders will begin to default en masse. NAMA will fail in its primary objective of ‘getting the banks lending again’.
When interest rates go up, as the European economy recovers, many households now barely making their monthly mortgage repayment will find themselves having to restructure their mortgages, or default entirely. What’s going to happen when thousands of homeowners throw their keys back over the bankers’ desks?
Banks, through the courts, have a set of processes for dealing with the painful processes of individual mortgage defaults. There is no process for dealing with hundreds, and perhaps thousands, of mortgage defaults in a short space of time. Banks will be left with large swathes of bad debt, and will come looking for taxpayer assistance again if they can’t raise funds on the interbank market to cover their losses. We will be back to square one, needing a NAMA 2.
Why?
Like banks, individual households are highly leveraged, meaning the ratio of their debt to their equity (for most people, their home) is large. The recent Law Commission report puts the ratio of household debt to disposable income at 176%. Just for this reason alone, the probability of large-scale household default is very high. There are other reasons to be concerned about household debt however.
First, the current level of mortgage repayment is low, because of historically low ECB interest rates. Mortgage repayments must, as I’ve mentioned, rise as the EU economy improves in the coming eighteen months and the ECB increases interest rates.
Second, the Central Bank forecasts unemployment to rise to 14%, and perhaps above 14%, in 2010. More and more households will therefore be unable to meet their mortgage payments.
Third, a recent study by David Duffy of the ESRI puts the number of homes in negative equity at 196,000 homes, implying the pool of potential defaulters is large.
To get a very rough sense of the scale of the problem, multiply the 196,000 homes in negative equity by the average mortgage price of a home today, around €235,260. We have €46,110,960,000 of potential bad debts for banks, just from this pool alone. 46 billion euros. If even 15 or 20% of those homes, and only those homes, default, we have another banking crisis, because banks won’t have the capital to absorb so much bad personal debt at once.
Will there be a NAMA 2 for personal and household debt? Can banks and the government devise a formula to forgive part of the principal for homeowners, and absorb the losses partially through a combination of blanket restructuring, debt-equity swops, swift personal bankruptcy processes, and refinancing? I don’t think the combination of financial and regulatory innovation under political pressure is beyond our leaders, but it does seem like a lot to ask for, considering the NAMA 1 money will be well and truly spent in 18 months’ time, and Ireland’s national debt may be as high as 120% of its national output.
I don’t believe that NAMA in its current form will get banks lending again. Even if NAMA’s critics are 100% wrong, and NAMA succeeds brilliantly, bankers know that another set of ‘impaired loans’ are on the way, and so banks won’t lend into the `real’ economy — to businesses and households — at reasonable rates of interest, because they expect that householders will begin to default en masse. NAMA will fail in its primary objective of ‘getting the banks lending again’.
When interest rates go up, as the European economy recovers, many households now barely making their monthly mortgage repayment will find themselves having to restructure their mortgages, or default entirely. What’s going to happen when thousands of homeowners throw their keys back over the bankers’ desks?
Banks, through the courts, have a set of processes for dealing with the painful processes of individual mortgage defaults. There is no process for dealing with hundreds, and perhaps thousands, of mortgage defaults in a short space of time. Banks will be left with large swathes of bad debt, and will come looking for taxpayer assistance again if they can’t raise funds on the interbank market to cover their losses. We will be back to square one, needing a NAMA 2.
Why?
Like banks, individual households are highly leveraged, meaning the ratio of their debt to their equity (for most people, their home) is large. The recent Law Commission report puts the ratio of household debt to disposable income at 176%. Just for this reason alone, the probability of large-scale household default is very high. There are other reasons to be concerned about household debt however.
First, the current level of mortgage repayment is low, because of historically low ECB interest rates. Mortgage repayments must, as I’ve mentioned, rise as the EU economy improves in the coming eighteen months and the ECB increases interest rates.
Second, the Central Bank forecasts unemployment to rise to 14%, and perhaps above 14%, in 2010. More and more households will therefore be unable to meet their mortgage payments.
Third, a recent study by David Duffy of the ESRI puts the number of homes in negative equity at 196,000 homes, implying the pool of potential defaulters is large.
To get a very rough sense of the scale of the problem, multiply the 196,000 homes in negative equity by the average mortgage price of a home today, around €235,260. We have €46,110,960,000 of potential bad debts for banks, just from this pool alone. 46 billion euros. If even 15 or 20% of those homes, and only those homes, default, we have another banking crisis, because banks won’t have the capital to absorb so much bad personal debt at once.
Will there be a NAMA 2 for personal and household debt? Can banks and the government devise a formula to forgive part of the principal for homeowners, and absorb the losses partially through a combination of blanket restructuring, debt-equity swops, swift personal bankruptcy processes, and refinancing? I don’t think the combination of financial and regulatory innovation under political pressure is beyond our leaders, but it does seem like a lot to ask for, considering the NAMA 1 money will be well and truly spent in 18 months’ time, and Ireland’s national debt may be as high as 120% of its national output.
The view from abroad: NAMA
"Two of the world's leading economists today fundamentally differed in their views on the Irish government's NAMA plans.
Nouriel Roubini, Professor of Economics, Stern School of Business NYU, and Willem Buiter, Professor of political economy, London School of Economics, have both today come out with opposing views on the Irish Government's plan to address the financial crisis and the deflation of the property bubble through the setting up of NAMA." Click here for the full story.
Nouriel Roubini, Professor of Economics, Stern School of Business NYU, and Willem Buiter, Professor of political economy, London School of Economics, have both today come out with opposing views on the Irish Government's plan to address the financial crisis and the deflation of the property bubble through the setting up of NAMA." Click here for the full story.
Monday, 19 October 2009
Guest post by Stephen Kinsella: NAMA will not get banks lending again
Stephen Kinsella: The primary objective of the National Asset Management Agency is to increase the flow of credit to the ‘real’ economy — that’s you and me, homes and businesses — by clearing banks’ balance sheets of ‘impaired’ assets. The story goes that these assets reduce the banks’ abilities to borrow on the interbank lending market, choking the banks of the necessary funds to lend out to small and medium businesses. Starved of capital, the businesses fold, and people are made unemployed; economy and society generally suffer.
The ‘impaired’ assets to be bought by NAMA are to be seen as the dam obstructing the flow of capital to these businesses, and their removal will start the process of lending by our retail banks off again.
This logic is flawed.
The cleansed banks will not begin lending once the transfer of loans to NAMA is complete, and NAMA’s bonds are swopped for ECB cash. Even completely cleansed banks are not enough to restore lending to previous levels for several reasons.
First, we are in a completely different business environment. Banks as for-profit going concerns are right not to lend to prospective borrowers whose businesses are too risky: that behaviour would throw away the cash NAMA just gave the banks.
Second, banks debt in relation to their equity—their leverage—is too high, meaning they need to pay down their debts quickly, and cannot do so while lending out more money, which would perforce increase their debt.
Third, despite evidence to the contrary, bankers are smart people. Bankers understand instinctively that the level of uncertainty in the economic system is very high, so they will try to increase their cash balances to compensate for that reduction in certainty. As JM Keynes once wrote: “The possession of actual money lulls our disquietude, and the premium which we require to make us part with money is the measure of the degree of our disquietude”. Our bankers now have a ‘liquidity preference’ for cash, meaning we won’t see increased lending to the real economy at reasonable rates of interest. Banks can always manage to lend at unreasonable rates of interest, but that doesn’t help the real economy.
Fourth, all our bankers understand that even if NAMA succeeds brilliantly, beyond even its greatest supporters’ dreams, their balance sheets contain another ticking time bomb: the coming implosion of the Irish residential mortgage market. The ECB will increase its interest rates in the coming year. When hundreds, and perhaps thousands, of homeowners throw their keys back in the bankers’ faces, and create another slew of bad debt to be mopped up, the bankers know they will need cash waiting to cover these bad debts, in addition to another bailout from the taxpayer.
Banks will not lend to risky propositions in riskier times when their balance sheets (and their fiduciary duty) is to deleverage. The bankers will wisely sit on the cash we will have injected into their balance sheets, and wait until the time is right to call for more.
It is now a foregone conclusion that NAMA will be brought in. NAMA’s basic form is unalloyed by months of intense public debate on the merits and demerits of this ‘bad bank’. Given that NAMA will not meet its objective to increase lending to the real economy, we must urgently consider major modifications to NAMA as it moves through the committee phase toward its eventual implementation.
Dr. Stephen Kinsella is a Lecturer in Economics at the University of Limerick and author of Ireland in 2050: How Will We be Living? (Liberties Press)
The ‘impaired’ assets to be bought by NAMA are to be seen as the dam obstructing the flow of capital to these businesses, and their removal will start the process of lending by our retail banks off again.
This logic is flawed.
The cleansed banks will not begin lending once the transfer of loans to NAMA is complete, and NAMA’s bonds are swopped for ECB cash. Even completely cleansed banks are not enough to restore lending to previous levels for several reasons.
First, we are in a completely different business environment. Banks as for-profit going concerns are right not to lend to prospective borrowers whose businesses are too risky: that behaviour would throw away the cash NAMA just gave the banks.
Second, banks debt in relation to their equity—their leverage—is too high, meaning they need to pay down their debts quickly, and cannot do so while lending out more money, which would perforce increase their debt.
Third, despite evidence to the contrary, bankers are smart people. Bankers understand instinctively that the level of uncertainty in the economic system is very high, so they will try to increase their cash balances to compensate for that reduction in certainty. As JM Keynes once wrote: “The possession of actual money lulls our disquietude, and the premium which we require to make us part with money is the measure of the degree of our disquietude”. Our bankers now have a ‘liquidity preference’ for cash, meaning we won’t see increased lending to the real economy at reasonable rates of interest. Banks can always manage to lend at unreasonable rates of interest, but that doesn’t help the real economy.
Fourth, all our bankers understand that even if NAMA succeeds brilliantly, beyond even its greatest supporters’ dreams, their balance sheets contain another ticking time bomb: the coming implosion of the Irish residential mortgage market. The ECB will increase its interest rates in the coming year. When hundreds, and perhaps thousands, of homeowners throw their keys back in the bankers’ faces, and create another slew of bad debt to be mopped up, the bankers know they will need cash waiting to cover these bad debts, in addition to another bailout from the taxpayer.
Banks will not lend to risky propositions in riskier times when their balance sheets (and their fiduciary duty) is to deleverage. The bankers will wisely sit on the cash we will have injected into their balance sheets, and wait until the time is right to call for more.
It is now a foregone conclusion that NAMA will be brought in. NAMA’s basic form is unalloyed by months of intense public debate on the merits and demerits of this ‘bad bank’. Given that NAMA will not meet its objective to increase lending to the real economy, we must urgently consider major modifications to NAMA as it moves through the committee phase toward its eventual implementation.
Dr. Stephen Kinsella is a Lecturer in Economics at the University of Limerick and author of Ireland in 2050: How Will We be Living? (Liberties Press)
Thursday, 15 October 2009
NAMA: trick or treat?
Slí Eile: I see that over on irisheconomy.ie Karl Whelan is doing overtime churning out one blog after another on the NAMA business plan. His latest Hard to Deny Now that NAMA is a Developer Rescue Plan is generating a lot of discussion. I am not a fan of NAMA. Prevous blog here Different views emerge about just how dangerous NAMA is as well as on tactics about where we go from here. Is it too late now that the Government have secured their position?
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