Middle East funds look to Irish stud farms

By Neil Callanan in Dublin

Published: April 25 2011 21:01 | Last updated: April 25 2011 21:01

Middle Eastern sovereign wealth funds have approached Ireland’s National Asset Management Agency, looking to buy high-end hotels with large grounds for use as stud farms for horses, government insiders in Dublin say. The move could provide a boost to Ireland’s flagging bloodstock industry, which produces 10 per cent of the world’s racehorses each year.

Nama has already been approached by at least two sovereign funds seeking to buy hotels, a senior government insider said. They are “not interested in them as hotels but as houses”, while their real interest lay in the land around them “for use as bloodstock”, the official said.  (link to article)

He is now a member of the largest party, Fine Gael shortly to lead the new Irish government. Congratulations Peter, well earned!

Let us hope his luck holds and he is given a seat near (‘at’ is too much to hope for a political neophyte) the table.

Why is Brian Lenihan about to take €1.8bn from pensioners to bail out AIB shareholders and junior bondholders?
from NAMA Wine Lake by namawinelake

The short answer is “I don’t know” but this is precisely what this modern day inverse of Robin Hood is about to do – take €5.4bn from our National Pension Reserve Fund (NPRF) to buy shares in Allied Irish Banks (AIB and for our international friends again has nothing whatsoever to do with Anglo Irish Bank which is known here domestically simply as “Anglo”), and he is making the NPRF buy the shares at €0.50 each when two days ago, on Friday last they closed at €0.337 per share meaning that the NPRF will incur a loss of €1,760m from the start. The NPRF was set up to fund future pensions of ordinary citizens from 2025. AIB meanwhile had a market value of €364.2m of which we, the State, own €66.7m (that shareholding is from the conversion of our 8% dividend due on the €3.5bn preference shareholding in May 2010 to ordinary shares). According to the latest AIB accounts (the Interim Report for the first six months of 2010) the bank appeared to have over €4bn of junior (or subordinated) bondholders (note 32 on page 87). As we know, we can legally require these junior bondholders to accept a haircut on their debt. So, why is Brian Lenihan forcing our pensioners to pay €1.8bn to bail out the remaining €297m of private AIB shareholders and €4bn+ of subordinated debt holders? This entry examines the issue.  (link to full article)

Nama was painted as a socially responsible undertaking that will be reporting to the Government ministers on the issues of ‘social dividend’. It will provide housing for the poor and will take off the market vast surpluses of unwanted properties. Nama will also deliver a healthy dividend by charging local authorities for this ‘service’. But the local authorities will still somehow come on top by saving money.

Perhaps mindful of having produced too much gibberish of the above variety, our public representatives have started talking up the discounts that Nama will apply on loans it buys from the banks. Just 6 months or so ago Nama enthusiasts were saying that a 12-20 percent average discount will reflect the ‘true long term economic value’ of the loans? Now we are into 30-35 percent haircuts and rising.

The iron logic of finance tells us that the greater the discount Nama imposes the greater proportion of the original loan will have to be written down by the banks as a loss. This will require fresh capital, of which the taxpayers are the only source for no investor will be willing to buy new shares in Irish banks voluntarily.

By my estimates from some 9 months ago, the Irish banks will require Euro 10-13 billion of fresh capital the minute Nama goes through their books. After months of ignoring this prediction, the Government now admits as much.  ….

This arithmetic is not escaping the ECB. Since December, we are painfully aware of Frankfurt’s intentions to close the discount window through which Irish banks have already pumped some Euro 98 billion worth of junk-rated assets in exchange for cash. By all Euro area standards, Ireland – a minnow accounting for roughly 1.8 percent of the entire common currency economy – has swallowed about 19% of all cash released by the ECB since the beginning of the crisis. More than any other country in absolute terms. Add to that the prospect of Euro 59 billion worth of Nama bonds, plus another Euro 10-12 billion for banks recapitalization, Irish banking system bailout can cost ECB up to Euro 170 billion in loans secured against, you’ve guessed it – unfinished estates in the middle of nowhere.

So understandably, the ECB folks are worried. By May they will start reversing junk securities they loaned against out of their vaults and back into the banks. Should they succeed, Irish taxpayers will be stuck for more cash to plug the new hole in banks balancesheets.

Which in turn will drive the quality of our collateral even lower. Mortgage rates will climb by 100-150 basis points for those of us who are still paying them down. Cost of credit for businesses will rise well into double-digit figures. Credit cards, car loans, consumer loans – all will become as rare in Ireland as polar bears in Sahara. Taxes and charges will increase – by 15-20 percent on average over 2011-2013. Instead of banks stimulating demand for credit, as Alan Ahearne suggests, Ireland Inc will be back on the slippery slope toward deeper recession.

Ultimately, it is the prospect of Ireland sliding back to rival Greece as the drag on the Euro that has been bothering my friends, as well as the ECB and the EU Commission. Sadly, their concerns are our last line of defense against Nama. (link to article)

…This isn’t to say that a NAMA vehicle shouldn’t have been part of the solution: I advocated prior to Peter Bacon’s report that an asset management agency should be part of a comprehensive solution. At this point, it will be interesting to see in the end how different an outcome we get from the one I proposed last Spring and if it’s not so different, whether the government’s policy in the interim period will be seen as the dithering of officials in denial or an inspired period of delay to allow some breathing space to deal with the problem.

One shift in my thinking since last Spring is that the size of loan losses is now clearly large enough to warrant putting the banks through a resolution process and negotiating with bondholders prior to using state funds to recapitalise. In particular, it is worth noting that the covered banks have about €10 billion in outstanding subordinated bonds (€8 billion of which is accounted for by AIB and BoI).

Without doubt, our usual Bond friendly commenters will tell us that any subordinated bondholders losing money would lead to financial ruination for every Irish man, woman and child. However, given that the European Commission has been taking a hardline stance on the idea of state funds being used to compensate subordinated bondholders (see here and here) it is hard to see how this position can really be justified on practical or moral grounds. (link to article)

The phoney holiday, when Irish banks pulled in their claws during the great rescue, is nearly over. As predicted the big bank squeeze on ordinary customers is about to begin as banks turn on the taxpayers that bailed them out to fatten margins in an effort to repair their ruined balance sheets – and make their NAMA repayments.

It is the worst result for ordinary Irish depositors and borrowers that, having driven the ambulance to the scene of the accident and saved the banks from certain death, their response now is to charge us for it. Of course the butcher’s bill has been delayed while banks engaged with Government and, cut off from capital markets, desperately sought new deposits, but don’t let that fool you.

Last year that meant offering gravity defying deposit rates despite historic lows in the ECB base rate but as soon as the first tranche of NAMA loan capital is in place in a few weeks, all bets are off, as banks ruthlessly pursue every trick in the book to grow their profits. So get ready to be mugged by; (link to the bad news)

David McWilliams offers a similar depressing future for the Irish middle class who are the heaviest borrowers and now deeply in debt with no apparent way out.

We are broke. The middle aged, middle classes are rocked by the sudden unemployment of their children (30pc of our under-25s are unemployed) and the collapse in value of their second home. On top of that, their pension funds — which were invested by charlatans in the shares of Irish banks — are now worthless (and after the nationalisation of the big two, they will be wiped out altogether)….

Selling now, even if it saves money over the longer term, will crystallise the losses and leave the average family with a huge debt to the banks. So the natural tendency is to hope that something will turn up. But what if it doesn’t?

The other option is to go back to the Ahern/Cowen model of borrowing to get rich. We know that doesn’t work and anyway it has been supplanted by the Cowen/Lenihan model of the State borrowing in order to try to protect the already decimated shareholders of the banks. This leads to NAMA and the errant folly of betting the country yet again on the hope that the property market will recover to make the bad balance sheet of the banks good again.

But even looked at from first economic principles, for the Fianna Fail plan to happen, the banks have to lend out money. But the middle classes don’t want their money (even if the banks had it) because they are stuffed with debt anyway. In short, the broad middle classes still think that if we do the right thing, things will turn around. (link to article)

What does it take for the Irish middle class to rebel?

Ann had suggested this very course to Icelanders citing the success of the 2000 Jubilee campaign.

About one quarter of Iceland’s voters – 56,000 people – recently signed a petition which urges President Olaf Ragnar Grimsson to ‘drop the debt’ owed to the British and Dutch governments.  This petition reflects the view of 70% of Icelanders, according to a poll taken in August.

This debt – which amounts to 12,000 Euros per Icelandic citizen – is the result of reckless lending by an unregulated, private bank – and reckless, unregulated borrowing by British and Dutch depositors that earned high real rates of interest on their risky deposits – until things went wrong.

For political reasons, these depositors were bailed out by the British and Dutch governments – at a cost of about 50 Euros per citizen.

A country with a population the size of the city of Leicester – 317,000 – is now asked to bear the full burden of losses incurred by a private bank, and by private citizens in two countries with a joint population of 76 million.

Icelanders – the people of countries as diverse as Rwanda, the Phillipines and Argentina feel your pain. Millions of Jubilee 2000 campaigners would salute your struggle to drop the debt. They would urge you to follow their example, and keep up the pressure. After all they did not give up until more than $100 billion of debt owed by 42 countries was acknowledged as unpayable by powerful creditors.

You dear people of Iceland, can do the same. (link to article)

Ambrose Evans Pritchard of the Telegraph is more circumspect, perhaps because UK savers are involved  but nevertheless outlines a convincing justification for the disgruntlement of Icelanders.

Iceland’s Left-wing coalition – which unseated free marketeers in February’s “Saucepan Revolution” – has backed the Icesave terms, deeming it is the only way for Iceland to move beyond the disastrous episode. The petitioners said they accept that Iceland’s people should foot part of the bill, but object to the “Versailles” terms: a loan at 5.55pc interest, to be repaid within 15 years. The central banks said this will increase Iceland’s public debt by 20pc of GDP.

A report by Sweden’s Riksbank said Britain and Europe share blame for the fiasco. It said “absurd” EU rules – which cover Iceland indirectly – told states to set up a “guarantee scheme” for banks, but never said taxpayers were liable for losses.

The reports added that the UK “hardly bothered” to inform savers that the schemes were ill-funded. “The conclusion is clear: the EU host countries (UK and Holland) are also to blame for Iceland’s disaster. It would be reasonable that they carry some of the burden. It takes two to tango,” it said.

The UK Financial Services Authority said it was unable to stop Icelandic banks raising deposits in the UK under the EU’s “passport” system, even when they began milking UK customers to cover losses at home.

Whatever the rights and wrongs, Iceland was by then already being crushed by a financial tsunami. Britain’s use of anti-terror laws at that moment will not sit pretty in diplomatic history. (link to article)

“One suggestion may be that Government immediately indicate that stamp duty and property taxes will become aligned and integrated. The easiest way to do this might be to suggest that for anyone moving now, their stamp duty liability can be paid over the next 10 years rather than in one lump sum on the day of purchase. Thus in our example above, the buyer would pay close to €1600 per year for the next ten years. Once the proposed property tax is introduced, two things could be done.

* In Scenario 1, the purchaser above continues paying their €1600 per year stamp duty until the 10 years is up and then switches over to paying the property tax. There is no double taxation at any time.
* In Scenario 2, the purchaser above continues paying their €1600 per year stamp duty until the property tax is introduced. They then pay the greater sum – either continuing as in Scenario 1 above or switching to the property tax if that is appropriate. Again, there is no double taxation at any time.

Doing something along these lines will achieve two things. Firstly, it will give greater certainty to those contemplating a move that they will not be taxed multiple time on the same property. However more importantly, it removes the immediate burden of a family finding a large stamp duty lump sum at a time when credit is tight and they may already have significant difficulty in finding the cash to finance the deposit on a new home.” (link to article)

Smart Taxes does not support the The 80% betterment or windfall tax included in the NAMA Bill as such a transaction tax will inevitably  freeze the development property market (unlike an annual tax on the rental value of zoned land).  The windfall tax will not apply to already zoned land (for its current use) so that it may have been conceived as a mechanism to preserve and enhance the NAMA zoned development land portfolio.  An important, perhaps unintended, consequence is that it would actively inhibit the de-zoning of surplus to requirement development land which is absolute foundational condition for sustainable settlement planning in many rural areas.

We also of course had deep concerns about the burden the taxpayer will carry given the undoubted risk brought by government underwriting of NAMA that will leave little room for the ‘low tax economy ‘ which was and still is , part of the framework set for the Commission on Taxation and thus Smart Taxes deliberations.

However, we had not twigged the deep philosophical disadvantages of NAMA in terms of the land reform agenda identified by our geographer friends…

In the foundational text for modern political theory – Politics – Aristotle was very concerned with conflicts arising from private ownership of property. Although he did not state it explicitly, he was essentially broaching the question of class conflict in ancient state systems. He felt that if in a perfect democracy there were extremes of rich and poor, the poor would use their democratic right to initiate land reform and confiscate property from the rich. He considered this to be unjust on the basis that if one considered this to be just then ‘all the acts of a tyrant must of necessity be just; for he only coerces other men by superior power, just as the multitude coerce the rich’. One could debate Aristotle’s judgement about justice and injustice at length. But it is his potential solutions to the problem that are most insightful and have most contemporary relevance. In democratic states, he saw two ways of dealing with the difficulty: the first option was to reduce inequality so that the poor would not be inclined to initiate land reform; the second option was to reduce democracy so that the poor would not have the power to initiate land reform. The question then arises as to which of Aristotle’s two solutions the state is currently pursuing with regard to contemporary failings arising from private ownership of property: so, is NAMA an attempt to reduce inequality or reduce democracy?  Link to article.

Stacy-Marie Ishmael of the FT has commented very sceptically..

Under the terms of the plan, announced in September, Ireland will pay €54bn to take over bank debt with a book value of €77bn. The initiative is intended primarily to free the banks of their toxic asset burden and encourage lending to small businesses, according to finance minister Brian Lenihan.

But contrary to initial appearances, banks won’t be taking a haircut on the assets so much as they will be  getting something of a hair transplant, as one person familiar with the plan put it.  (link to article)

Constantin Gurdgiev picked up evidence of legal glitches of Nama operations that might impact on its ability to do business with non-national financial institutions.

International Swaps and Derivatives Association (ISDA) has issued an interesting opinion on Nama worth a read. Here are the main points (mind the legalese):

“…from an international perspective, a particular aspect of the NAMA Bill that has the potential to have a significant adverse effect on the transaction by participating institutions …of domestic and cross-border financial transactions, including privately negotiated or “over-the-counter” (OTC) derivative transactions (“Relevant Transactions”). (link to full article)

Edward Harrison in the European Economonitor thinks we are heading to the IMF in a boat without a paddle…

So you have a trifecta of bad news coming out of Ireland: a two-notch downgrade by a major ratings agency, a warning from the EU that the economy will be weak for sometime to come and that deficits targets will not be met, and another warning from the OECD that the banking situation in Ireland is still very grave.

Quite frankly, it is not looking good for an Irish recovery at this time without the help of the IMF. This all brings me back to my question one year ago: Is Ireland the next Iceland? They will be if the EU, IMF and Irish government do not take today’s bad news seriously and take drastic action to bolster the Irish banks, economy, and government finances. (link to article)