ANALYSIS:Any fire sale of assets would reveal the extent of the collapse in property prices, writes ARTHUR BEESLEY
THE SUPREME Court’s rejection of Liam Carroll’s appeal for an examinership of the Zoe group has the potential to upset a central part of the Government’s controversial plan to stabilise the banks with the National Asset Management Agency (Nama).
With Carroll now at risk of insolvency proceedings before legislation to establish the “bad bank” is enacted, any fire sale of assets to raise funds for Zoe would present the public with a vivid illustration of the drastic collapse in values since recession set in. Such values are likely to come in lower than the “long-term economic value” that will guide the price at which Nama buys assets, laying bare the gap between current values and the rules set for the “bad bank”.
Given that taxpayers will be on the hook for tens of billions of euro when Nama sweeps up assets from the beleaguered banks, any such development would clearly discredit the new agency’s modus operandi. All the more so given the parlous state of the public finances, tax hikes, the threat of more increases, cutbacks and ballooning exchequer borrowing.
In what is likely to be a difficult Dáil debate when TDs return from their summer holidays next month, it would fall to Minister for Finance Brian Lenihan to defend paying above current prices for assets whose values have altogether collapsed.
While the Government insists that the valuation parameters will be in line with EU rules, persuading taxpayers that the State should pay over the odds at a time of great fiscal strain would be more difficult in the event of Zoe going into insolvency.
The argument can be amplified when considering that the mechanisms used to calculate long-term value will be set out by Lenihan himself. No matter how careful the Minister is, the answers provided by any valuation metric will be necessarily speculative and, therefore, prone to error. The Minister promises a bank levy to recoup any losses but that would be many years down the line.
The lending blitz that characterised Ireland’s property boom was predicated on an different set of economic estimations, which had but little connection with long-term fundamentals and led to the current banking crisis. If Nama proceeds as planned, the Government will be asking taxpayers to take on trust a potentially fallible valuation system under which banks receive more for assets than their current worth.
At another level, however, a fire sale of Carroll assets may well weaken the hands of banks as they prepare to engage with Nama.
Pummelled by a crisis of their own making which leaves them leaning on State guarantees and capital for their very survival, the bigger institutions may find it difficult to fight for a lower discount from book value when it comes to crunch time.
If that could play into Lenihan’s hand, political difficulty is inevitable if Carroll’s assets set a drastically low value on assets that would otherwise be acquired by the State at a much higher price.
Still, the Government insisted last night that the Supreme Court ruling changed nothing.
“It makes no difference. Nama will proceed as planned,” said Lenihan’s spokesman. “We’ve always made clear that Nama will operate in line with EU Commission guidelines, which set out the use of the long-term economic value measurement.”
One of Lenihan’s objectives when publishing draft Nama legislation last month was to stimulate debate about the plan. While a fire sale might take some time, there is every possibility now that real market valuations will provide a backdrop for Nama’s best guess of long-term value. Soon we will see.
