A similar contrast in fortune is playing out in modern day Irish life and commerce. The treatment of debt in this country depends on who you are and how much you owe. Inequality of treatment of debtors has reached breathtaking proportions. Policymakers cannot continue to underwrite such awesome inequity.
Are you part of the NAMA elite? Namely: Derek Quinlan, Bernard McNamara, Paddy Kelly, John Flemming, Johnny Ronan, Richard Barrett, Patrick Shovlin, Sean Dunne, Liam Carroll, Ray Grehan or a member of the Mansfield family. If so, you are kindly requested to submit a business plan. The top 180 borrowers owe our state agency €62 billion. They explain that their assets are no longer worth the loan values. All is forgiven. Well, not quite — almost 60% to be precise.
NAMA now expects and accepts that if they get back what they paid banks for the loan, they’ll agree settlement terms. Cumulatively, this amounts to a debt write-off of more than €37bn out of a total original loan book of €72bn.
Publication of the annual report and accounts of NAMA for 2010 brought about new norms of debt restructuring. They realise “you can’t get blood out of a stone”, “we are where we are” and “it is what it is”. They plan to eventually dispose of these assets at market prices and write off residual loan shortfalls. FG and Labour have no policies on what to do with NAMA, other than vague aspirations about greater transparency and earliest sale of property tranches.
They reversed proposals to transfer a further €16bn of loans (sums less than €20 million). These smaller developers are left with their lenders.
Unlucky for them. Their bankers can continue the recovery process beyond asset disposals to grab any other personal resources they may own or future earnings. Despite promises and protestations, the revised NAMA template provides a bail out mechanism for their 11,500 loans on 16,000 properties. The NAMA charter facilitates a fresh start. The scale and complexity of the NAMA management recovery task means their best case scenario, post collapse, is to retrieve the tax payers’ outlay of €30.5bn.
NAMA acquired their assets with a valuation base date in 2009. This was not the bottom of the market cycle. According to MyHome.ie, Daft.ie and the Central Statistics Office databases, the peak of the market was probably in March 2007.
By the end of June this year, average falls in home values varied between 40%-47%. Further reductions continue on a monthly basis, with some of the sharpest adjustments occurring this summer. Within the national decline, there are significant regional variations between cities and more remote locations. There is no sign yet of a moderation in the rate of the slump.
A detailed analysis of future price prospects indicates that house prices could still be overvalued by up to 25%. Irish house prices between 1996 and 2007 increased by more than three times in value. When the bubble burst, a new price floor has to be established in values. This must be linked to income levels. Over a 40-year period up the mid-1990s, a ratio of average industrial earnings to new house prices in Dublin was an average multiple of 5.3. At the peak, this rose to almost 14. So far, it has only fallen back to 7.2. If we revert to the previous multiplier in the 1970s and 80s, a further 20% reduction is possible. The smarts in NAMA may do well to recover their outlay.
This new culture of debt settlement logic represents a parallel universe to ordinary folk. Official wholesale denial remains about the epidemic of householders who will never be able to repay their debts, given the same market.
Some 270,000 people bought houses between 2005 and 2008. Based on identical dynamics of property devaluation, we can calculate the scale and extent of their losses. It’s more than €10bn of €115bn of unpaid house loans. More than 60,000 households will have personal losses that are greater than €50,000.
The crucial difference is that their debts aren’t deemed as suitable for corporate correction, only personal penalisation. These mortgages are subject to full individual recourse. The key point being a de facto personal guarantee on residual unpaid debt that can be pursued after the house is either vacated, repossessed or sold. As a special extra punishment, they can be subject to degrading, draconian personal bankruptcy laws.
Can NAMA writedowns of 58% be applied on a household basis to mortgages?
Average negative equity rates require debt restructuring of 30% on distressed loans. Official policy-makers in the Department of Finance, the Central Bank, the Financial Regulator, NAMA and surviving banks AIB and Bank of Ireland all access this same data. They simultaneously are capable of rationalising the settlement of a rich man’s debt, while turning a blind eye to comparable treatment for a poor man’s debt. This fog of denial centres on moral hazard.
A “beggar thy neighbour” narrative is expounded — that neighbour being the adjoining householder who was prudent and has no debt. Official schizophrenia applies to the same debt facts and delivers opposite outcomes.
Another glaring anomaly arises in the commercial approach to NAMA clientele.
Businesses are enduring economic correction through insolvency. For Musgraves to make a success of Superquinn, they have to dismantle €452m of syndicated bank debt. For Xtravision to revitalise itself, the examinership process must rip up high street shop leases. Eircom is likely to face some form of debt repudiation of their legacy €3.75bn finance. Amongst NAMA beneficiaries and bad debtors are promoters of the National Convention Centre in Dublin. Under the public private partnership deal agreed in 2007, a Treasury Holdings led consortium (Spencer Dock Convention Centre Dublin) is to receive €715m over 25 years, after which the state owns it.
Controversy attached to this project, with allegations of a sweetheart deal. The basic plan was that Ireland Inc would capture significant market share of global conferencing, worth €40bn annually, through 870 international association conferences being held in Europe alone. These delegates represent highest-spending tourists — paying premium rates for hotel stays. Convention Centre prices are locked into uncompetitive Celtic Tiger boom costs.
We are losing out to Barcelona, Birmingham, Vienna and Edinburgh. Tour operators and hotels need a boost, through an effective loss leader iconic attraction. It is not possible because the state is locked in to contractual commitments that result in 25% overpricing. €43m has been paid by the state to this consortium to date.
No one in Government wants to join up the dots. No leverage is being applied on NAMA to assist our national tourism effort. NAMA has been disastrous in terms of original ambitions to prevent bank nationalisation and provide credit to the productive economy.
There’s no equality of treatment between NAMA clients and every other debtor. We can’t negotiate with NAMA clients to unwind crazy construction commitments of the past. This NAMA narrative dwarfs Irwin Shaw’s novel.