ANALYSIS:The amended Nama Bill should help calm people's worst fears as to its threat to the State, writes SIMON CARSWELL
THE PUBLICATION of the Nama Bill brings what is arguably the most controversial and riskiest financial plan devised by an Irish government closer to fruition.
Fianna Fáil has ceded concessions to the Green Party, its junior coalition partner, in an attempt to win support for the Government’s “bad bank” and its plan to unblock the banking system of its toxic assets and kick-start new lending.
Six weeks after publishing the first draft of the Nama legislation, the Government’s updated version includes key differences.
“The Bill contains a number of important changes that will allow Nama to achieve its goal of stabilising the banking sector and restoring the flow of credit to business and consumers while minimising the risk to the taxpayer,” Minister for Finance Brian Lenihan said in a statement.
The changes will help soothe concerns about the risks being assumed by the State under Nama. The banks will share a portion of the risks with the taxpayer through the issuing of subordinated bonds, which carry higher risks for the banks but pay them a higher rate of interest.
Only a small part of the yet-to-be-disclosed knock-down price on the €90 billion loans will be paid in the form of subordinated debt. Most of it will be paid in government bonds.
Subordinated bonds are a convenient way to switch on and off interest payments due to the banks, depending on whether Nama recoups loans and make a profit. The bonds have another benefit – they allow the Government to create an incentive to encourage the financial institutions to help Nama recover loans. If the loans are recovered, Nama will pay the interest due on the “sub debt” in a given year. If there is no recovery, interest payments can be withheld.
The Government could also withhold the full capital amount owing by Nama to the banks on the “sub debt” if the State’s costs cannot be recovered by Nama.
Government sources signalled the risk to the taxpayer will be mitigated in three ways: the “sub debt”; the acquisition of large stakes in the banks which can be sold as their share prices recover; and by imposing an industry-wide levy after Nama.
The Government’s preference is to rely on the “sub debt” and the State’s shareholding in the banks to ensure that the taxpayer recovers its money through Nama.
The levy would be introduced if Nama emerged with a loss at the end of its lifetime. However, it is an indiscriminate way of recouping losses as good lenders which recover loans may be punished for the failures of bad banks.
Government sources said the “sub debt” would be either 10-year or perpetual, which hints at Nama’s expected lifespan. The sources indicated banks with riskier loans may not be issued a higher level of “sub debt” but the Government may instead chose to take a larger shareholding in a bank if the losses are so great in the Nama transfer.
Other concessions offered include a review of Nama by the Comptroller and Auditor General after three years, bringing greater accountability and transparency.
The Bill has also been changed to ensure Nama avoids “undue concentration or distortions in the market for development land”.
Bank chief executives will be banned from becoming chairmen, while cross-directorships will be limited. Government sources said European Central Bank funding at a discounted interest rate of 1.5 per cent should provide banks enough incentive to lend at rates well above this level to grow profits.
