To conclude...

Due to the continuing volatility of asset prices controlled by NAMA, it is imperative that they adopt an appropriate plan to achieve there repayment targets. Failure to do so would surely increase uncertainty with regards to NAMA's ability to achieve their prospective targets.

The above graph shows the month on month (MoM) % change in both house and rent prices over the period January 2005 - March 2011.. 

Month on month changes in both house prices and rent continue to show significant volatility, though both are showing signs of mean reversion.

Hopefully, as time goes on we will see both house and rent prices becoming more stable. This would be great news for NAMA especially as a more stable market would reassure buyers and hopefully encourage investors to re-invest in the property market (this time not so heavily leveraged) This would also come as a huge relief to the Irish taxpayer which is so heavily invested in NAMA at present. 

Thanks for reading!

All the best,

Patrick

The banker wins

Here is an animated photo which I feel gives a good insight into who the real winners are from the creation of NAMA 

How concrete is NAMA's future?

Since NAMA was set up in April 2009, a tremendous amount of work has been achieved in a relatively short period of time. By the end of September 2011, NAMA had acquired over 11,000 loans with an approximate face value of €71bn and a reported book value of around €31bn. During this time, NAMA has also established a robust and competent workforce which appears able in maintaining the recent impressive performance of the institution.

In what is hopefully the first of many, December 2011 saw NAMA selling off a portfolio of loans relating to a UK developer for a reported price of £280m. Furthermore, John Fleming, a developer whose assets had previously been taken over by NAMA has recently emerged from bankruptcy allowing him to draw a line under his €1bn – odd debts.  NAMA has also announced that they will make up to 2,000 Irish homes available for social housing before the end of 2012. However, NAMA has yet to foreclose on the full 2,000 homes, meaning the developers still have discretion over the disposal of the assets until NAMA finalizes the foreclosure process. 

A review carried out between September and October 2011 provides an update on the ability of NAMA in reaching their anticipated goals by 2019.  The report affirms that NAMA is currently at the point where experts expected it to be at this time. However, once again the future projections seem overly optimistic.  NAMA aims to repay €7.5bn of its debt by 2013, €16.5bn by the end of 2016 and €7.0bn by the end of 2019. While NAMA believes these goals are S.M.A.R.T (Specific, Measurable, Achievable, Realistic and Timed)! Experts fear that too much of the assets will be consumed to meet the first goal leaving a shortfall in assets for the remaining goals.

The need for NAMA

The collapse of the Irish construction bubble effectively transformed the balance sheets of the country’s largest banks into a toxic waste dump! The Irish Government along with the US and British government announced to the public that the major banks must not be left fail. In April 2009, the government announced that the National Asset Management Agency (NAMA) was to be established to take possession of the toxic assets held by the nation’s major banks in exchange for sovereign bonds. 

Essentially the aim was to address the serious threat to the Irish economy and provide stability to major credit institutions. This in turn would accelerate economic recovery while restoring confidence in the Irish banking sector. Despite best efforts by Irish politicians to portray the institution in a positive light, NAMA quickly became referred to as a “bad bank”, where the Irish tax payer would incur huge financial losses, while allowing the countries major banks to return to fiscal stability. Unsurprisingly, this solution was greeted with great scepticism by the Irish public. By July 2010, NAMA had taken over €16 billion worth of loans from the nation’s banks from which roughly only 20% were generating any income (predicted that 40% would be generating income by this time).

The government had originally estimated that NAMA would generate close to €4.8 billion profit for the exchequer by 2019. However, due the severity of the crisis and the initial slow performance of NAMA, it was rather unlikely that such optimistic results would ever be achieved within this expected time frame.

A revised report was released on behalf of NAMA towards the end of 2010. This report outlined three separate scenarios which forecast three possible Net Present Values of NAMA's activities over its expected lifespan.  

	Scenario A Recovery of longterm economic value	Scenario B Recovery of long-term economic value plus 10%	Scenario C Recovery of long-term economic value less 10%
Amount recovered from Assets	€44.7bn	€49.2bn	€40.2bn
Amount of debt securities to be redeemed by NAMA	€40.5bn	€40.5bn	€38.5bn2
Net Present Value	€1.0bn	€3.9bn	-€0.8bn

The demise of the Celtic Tiger

After almost 20 years of significant growth, Ireland’s economy began to look like a house of cards, stacked precariously on the assumption that the boom would continue forever! By 2008, the Irish economy had crashed more aggressively than almost all others affected by the global financial crisis.

To understand the causes of the collapse it is important to differentiate between the two growth stages. From the 1980s up to the year 2000 there was “true” export led growth coupled with competitive wages and inflation. After 2000, rapid growth continued based on irrational property prices and an unsustainable construction boom. This period of “false” growth resulted in Ireland being far greater exposed to the economic pressures of the global crash.

The abnormal increase in property prices during this period for a long time looked unsustainable. Yet, banks continued to relax lending standards despite increasing vulnerability. Reckless expansion by Anglo in an attempt to increase their market share resulted in them effectively failing in 2008, requiring a government bailout. Fearing a “run on the banks” authorities extended a guarantee on all Irish bank deposits, causing increased pressure on the market yields of Irish government bonds.

To make matters worse in 2008, a loss of wage competitiveness resulted in the unemployment rate more than doubling over a one year period (5% to 13%). Ireland inevitably started to experience a fiscal crisis with tax revenue being far less than anticipated (roughly 14%). Nevertheless, government spending continued to increase which worsened the deficit at such a crucial time.

It was not surprising that Ireland would be somewhat exposed to a global crisis, considering the economies dependence on exports and forgin direct investment. But, the Irish crisis from 2007 was not simply conditional on global factors. A home grown banking crisis, a loss in wage competiveness and a tax structure far too dependent on the continuity of the boom would all have most likely ended in a recession even without the global downturn. 

The calm before the storm

In January 1988 The Economist published a survey of the Republic of Ireland. The title read "poorest of the rich", a report which depicted a dark and dreary future for the Irish economy. Only a few years later, Morgan and Stanley conceived the term the "Celtic Tiger" which from then on would symbolise the glory days of the Irish economy. From 1988 to 2007 real GDP in Ireland increased by 6% per annum on average, with the figure reaching double digits on average during 1995 to 2000. Even more surprising, the unemployment rate which had been 16% in 1994 shrank to 4% by 2000 ( the lowest recorded unemployment rate in modern history). The area of employment in Ireland also experienced a significant shift away from agriculture with almost half the Irish labour force working in non-agricultural industries by 2007 portraying a new era for the Irish economy. 

Some ten years later The Economist pictured Ireland on the front cover with the title "Europe's shining light". By 2007, Ireland was at the frontier of economic prosperity. A rolling inflow of foreign direct investment driven by a low corporate tax rate (10-12.5% throughout the late 1990s), and an increase in EU aid to build infrastructure and improve education resulted in the level of income per head in Ireland exceeding the EU-15. The Irish standard of living increased dramatically over this period. Higher wages fuelled increased spending while low interest rates coupled with relaxed lending requirements gave people the opportunity to get a foot on the property ladder. Surely this was an economic miracle which other economies should aim to emulate.     

A brief outline of my blog

I have decided to base my blog on the Irish financial crisis. However, I am aware that this remains a rather topical issue and is probably the most influential finance issue facing Irish students today. In an attempt to provide a more unique interpretation, I have decided to direct my blog towards a particular aspect of the Irish financial crisis.

Post 1: My first entry will discuss the lead up to the financial crisis. I feel this is important because in order to understand where the Irish economy went you must first understand where it came from.

Post 2: I will then review the causes of the Irish financial crisis in a hope to explain how the Irish economy got in to such a mess!

Post 3: From there I intend to focus my blog on a specific aspect, the need for and the development of the National Asset Management Agency (NAMA). An institution created to address the severity of the Irish banking crisis. 

Post 4: Finally, I will conclude by discussing the performance of NAMA to date along with an attempt to predict what lies in store for NAMA in the future


I hope you enjoy my blog!


All the best,


Patrick