BANKING ON NAMA: THE FALL OF THE CELTIC TIGER?

Abstract

The Lowland Gorilla, the Iberian Lynx and the ëCeltic Tigerí share commonalities, they are all endangered species. Between 1995 and 2007 Irelands ëCeltic Tigerí economy experienced unprecedented levels of growth and was widely acclaimed as an exemplar of innovation and adaptation to economic globalisation. The expansion in National income and personal consumption aided by comparatively cheap and readily accessible debt, fuelled a real estate boom in both the commercial and residential property markets. In the 10 year period January 1998 to the market peak in January 2007 the average house price in Ireland had risen Ä216,533 or 129% (ESRI, 2007). In the commercial property market figures compiled by IPD demonstrate a sharp rise in capital growth across all three sectors in the period 2002-2007, which culminating in several consecutive years of double digit returns (IPD, 2008). In the midst of the boom cycle, the construction sector in Ireland experienced massive expansion, accounting for of 22% of GNP and 12% of employment in the economy by the end of 2006 (CSO, 2007). The growth within the construction sector was symbolic of the shift towards a more indigenously based economy driven by internal consumption. The financial crisis of 2007 and ensuing global recession exposed the fragility of Irelandís ëeconomic miracleí. Built on debt, with a banking industry massively over exposed to real estate, the Irish economy has ground to a shuddering halt. The dramatic downturn in real estate values both nationally and internationally has had a profound effect on the balance sheets of Irish banks, and undermined their commercial viability. Anglo Irish Bank has been nationalised, whilst both Allied Irish Bank (AIB) and Bank of Ireland have received substantive bailout packages from the Irish Government. The capital injection was a necessary first step to restoring a degree of functionality to the Irish banking industry. The next phase in preserving the banking sector will involve the transfer of property and property related loans into a National Asset Management Agency (NAMA) ñ a bespoke investment vehicle developed to cleanse the balance sheets of Irish Banks and remove uncertainty surrounding their toxic liabilities. Provisional estimates suggest property and associated loans transferred to NAMA will equate to circa Ä77.1 bn globally, whilst the majority of loans are secured against Irish domiciled assets (Ä 51.4 bn), Ä23 bn of loans have been secured against land and property assets across a number of European jurisdictions including the UK, Germany, France, Spain, Portugal, Italy and the Czech Republic. The paper presents a series of ìwork outî options for NAMA highlighting potential implications for European real estate markets given the geographic diversity of land and property assets over which NAMA will assume control. The paper will develop a model based on Fisherís Separation Theorem to examine the variance and inequality between outstanding debt obligations relative to underlying collateral value which is fundamental to the outworking of assets overtime. The paper emphasises the importance of sustaining an income stream over the lifetime of the vehicle and the need for strategic release of assets in order to prevent incessant downward pressures on property market values.