RTÉ - "Did Ireland's 'bad bank' NAMA work?"

[joe sod]

Not sure what came first the chicken (NAMA) or the egg (greenlight for ECB MRO access for NAMA bonds).........my guess is the egg came first.....as soon as the ECB indicated to tthe state that an off-balance sheet SPV with securities guaranteed by the state could be used as collateral by the banks to access ECB MRO using them.....the choice was clear.....you set up NAMA to get the €32bn capital injection at ultra low rates (1%).....the hubris I guess was thinking that the bond vigilantes would somehow think of these NAMA bonds as anything different than sovereign liabilities and that they wouldn't add it to our national debt.

ultimately then NAMA was a failure , Im talking about the actual decision to set up a bad bank in the first place because it crystalised all the "bad loans" immediately and that 32 billion was added to our national debt which precipitated the need for the government bailout anyway. If the government had known that they probably would have went with the other options like an insurance scheme whereby they would cover the bad loans of the banks if they went bad. Of course nobody knows how that would have gone , maybe the bond markets would not have bought that either. But politically the bad bank option did not save the then government. I remember that the department of finance were like headless chickens with no expertise on how to handle such a crises as Brian Lenihan recounted later

 

[letitroll]

ultimately then NAMA was a failure

Sure ex-post you can argue that.

At the time with the ECB offer of €32bn of 1% money for junk ABS using this NAMA SPV structure and the idea that the banks could be got clean again and lending....it was a very attractive lifeline/bailout option that in a roundabout way pulled the European's into Ireland's problems via the ECB.....basically an ECB backed extend and pretend scheme......it was just as things deteriorated further with the US/Global economy nobody was interested in pretending about anything....the correct posture was to assume anybody who might default would default and act accordingly i.e. sell or its sister not buy!

 

[Dr Strangelove]

it was just as things deteriorated further with the US/Global economy nobody was interested in pretending about anything

100%

Global economic recovery was extremely slow through the back end of 2009 and 2010.

If the global recovery had kicked in harder and earlier this would’ve put a lid on domestic economic trouble and the sovereign bailout might not have been necessary in late 2010.

The domestic narrative was always about Nama as an asset manager. Whereas in reality it was as much about giving the banks assets that the ECB could accept as collateral. This latter feature of the whole Nama project was undersold at the time, not at least to spare the ECB‘s blushes.

 

[BIG-notorious]

NAMA was a failure , Im talking about the actual decision to set up a bad bank in the first place because it crystalised all the "bad loans" immediately and that 32 billion was added to our national debt which precipitated the need for the government bailout anyway.

What precipitated the bailout was the collapse of the tax take which even with tax increases and spending cuts resulted in a massive deficit which at the time showed no indication of closing. The bailout was €32 billion but the budget deficits in 2010 and 2011 were €18 billion and €25 billion respectively against a 2011 tax take of €34 billion. Even if they'd been far lower than that at €10 billion annually if continued that represents a net present value of €300 billion or almost €30 bailouts.

The €32 billion had zero impact on the requirement for a bailout. None. The issue was the budget deficit and the bond markets.

The job of NAMA was to preserve a functioning banking system which was required for Ireland to have a functioning economy. If that €32 billion had been giftedto the banks with nothing in return it would still withoutquestion have been worth it.

The various governments of Ireland have done many (so very many) dumb economic decisions before, during, and after the crash right up to the present day. Recapitalising the banks via NAMA wasn't one of them.

 

[Dr Strangelove]

The €32 billion had zero impact on the requirement for a bailout. None. The issue was the budget deficit and the bond markets.

That’s wrong.

The gnomes of Zurich (aka The Bond Market) saw Nama bonds correctly as an Irish sovereign liability which - in conjunction with ballooning fiscal deficits and an economy in the toilet - would make public debt unsustainable without EU/IMF assistance by late 2010.

 

[skrooge]

ultimately then NAMA was a failure , Im talking about the actual decision to set up a bad bank in the first place because it crystalised all the "bad loans" immediately and that 32 billion was added to our national debt which precipitated the need for the government bailout anyway

It wasn't NAMA that resulted in the the bailout but it was the banking sector.

If the government had known that they probably would have went with the other options like an insurance scheme whereby they would cover the bad loans of the banks if they went bad. Of course nobody knows how that would have gone , maybe the bond markets would not have bought that either.

Exactly as you say, regardless of the measure used it would have been seen for what it was. The State had bitten off more than it could handle when it guaranteed the banks liabilities.

A further asset guarantee would have left the banks distracted by trying to manage their bad loans and not lending i.e., zombie banks, while the government hemorrhaged insurance payouts.

The writing was on the wall for the State, NAMA or no NAMA, it was just a question of how bad a banking sector we went into a bailout with.

But that's an altogether different question to the point of this thread.

 

[letitroll]

This latter feature of the whole Nama project was undersold at the time, not at least to spare the ECB‘s blushes.

100%.....our European partners really did to try to help......this was mission creep by the ECB.....and way outside its mandate....it was only later did it cross the rubicon and start buying sovereign debt directly itself to drive down borrowing costs....Europe has Ireland to thank.....our big little crisis expanded the Eurosystem toolkit and paved the way for the later monetization of sovereign debt directly by the ECB. The next crisis can thank us!

 

[joe sod]

costs....Europe has Ireland to thank.....our big little crisis expanded the Eurosystem toolkit and paved the way for the later monetization of sovereign debt directly by the ECB. The next crisis can thank us!

Was it not the Italian and Spanish debt crisis that did that because they were too big to fail, Ireland wasn't an existential threat in the overall scheme of things . Spain and Italy weren't bailed out like we were I think as they were too big for that approach therefore it was necessary to come up with mechanism that allowed the ECB to directly buy sovereign debt. We were lucky that the financial crash was global and not just an Irish affair as we never would have got the ultra low and negative interest rates that really got everything moving again

 

[letitroll]

Was it not the Italian and Spanish debt crisis that did that because they were too big to fail, Ireland wasn't an existential threat in the overall scheme of things . Spain and Italy

Yeah I was being a bit tongue in cheek......the big steps changes came when the too big to fail countries started melting down.

What GFC and COVID showed is that when push comes to shove collectively Europe has a tool kit approaching the USA.....debt monetization, federal-esque fiscal stimulus (eurobonds).....these things will be abused over time.....but they do backstop to a certain extent any GFC v2.0 from getting out of hand ala 2008....but as I said I think over the very long ark of time it will be abused by the politicians in Brussels to the EU's demise but thats likely very far away.