The former US Treasury Secretary Timothy Geithner’s recently published memoir, Stress Tests is deeply uncomfortable reading for anybody even remotely interested in the fortunes of the eurozone.
Mr Geithner lays bare the inept and shortsighted response by EU leaders to the financial and debt crises that threatened to rip the eurozone apart.
The fact that the single currency is still in use, and all member states are still in the club, rests squarely on the shoulders of one man, according to Geithner. And he is the president of the ECB, Mario Draghi.
Mr Draghi understood the magnitude of the problems facing the region, which prompted the now infamous July 2012 speech that he will, “do whatever it takes to save the euro and believe me, it will be enough.” In September of that year, he unveiled the outright monetary transactions programme.
Since then, eurozone borrowing costs for core and periphery countries have tumbled to record lows.
The biggest single factor behind the success of Nama is the effect of the ‘Draghi put.’
It is highly unlikely that international investors would have piled into Ireland at the rate they did over the past two years, if the economy was about to suffer a catastrophic rupture.
The other factor underpinning Ireland’s attractiveness is the Government’s fiscal record since the economy collapsed. It has reined in a budget deficit that ballooned to a record 32% in 2010. Just as important, it did not default on any debt repayments.
When then Minister for Finance Brian Lenihan said that Nama would turn a profit for the taxpayer, he was subjected to widespread ridicule.
Nama’s management team has managed its wind-down very well. It sold off the more lucrative assets in the UK while uncertainty clouded the Irish market. Unless there is a severe shock to the system, then it is almost certain the agency will meet its target of redeeming 80% of its senior debt by 2016.
The three domestic banks hold senior Nama bonds. As these bonds are very low-yielding, they act as a drag on growth. Consequently, AIB’s valuation will improve the sooner these bonds are redeemed.
Nama was once seen as a huge contingent liability for the State. The faster it is wound down, the better it will be for the country’s credit-worthiness.
The planned €3bn investment in the Dublin Docklands region and residential housing over the next few years will act as a welcome stimulus. Nicely time for the general election in 2016 as well.
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