In July the CES published the results of exhaustive stress test designed to put investors minds at rest that Europe’s banking industry was ready to withstand the slings and arrows of further outrageous fortune, and thus end them, to dream upon a better world (I didn’t get English A Level, but you get my drift).

The test measured if they had sufficient Tier One capital to survive highly improbably events such as sovereign default.

Out of 91 institutions given the once over seven failed, five Spanish two German.

No Irish.

Oh dear.

Is a refrain I hear on a daily basis, largely due to my three year old son’s addiction to Scooby Doo.
However the Irish finance minister Brian Lenihan is quoted in an interview with FT as saying that their priapic property boom was fuelled by pesky kids, sorry, “externally owned subsidiaries”, who have now buggered off and left them in the lurch.

Which given that the Irish government let their own banking sector swell to over 400% of GDP, is a bit like a coroner putting the cause of death of Mr Creosote down to one little “waffer thin” mint.

On the subject of foreigners distorting markets, this is an extract from an article about Irish investors in the UK, printed in an Irish business newspaper in happier times:

“The flood of Irish money - or Irish borrowed money - across the water has prompted some to question whether the buyers are overpaying.

The counter argument is that Irish investors sometimes see angles that others don’t. They have also shown a willingness to improve what they have bought, rather than just do the sums on the deal and wait for the money to come in.

If Irish investors are getting the reputation for overpaying, they are also getting a reputation for driving a hard bargain to get the rents up. They will also sometimes play around with the mix of tenants in the building as a way of getting more people in the door, if it is a retail property.”

I think that hindsight has proved which was the case.

And on the subject of cases, a case of Guinness to anyone who can confirm which deal the above quote was referring to!

The Irish Government have announced that NAMA will acquire real estate loan with a face value of €77bn for €54bn, report Property Week.

http://www.propertyweek.com/story.asp?storycode=3148961&origin=PWdailynews

This reflects the fact that they do not anticipate full recoveries on this debt and they have arrived at a 30% discount to par as a ‘fair value’. In reality this will have been a horse-trade between the losses the five big Irish banks can afford to take and the political pressure to ensure the Irish tax payer does not lose too much on these loans when they are eventually repaid.

It like a reasonable starting point and it was accompanied by a message from the government that the banking system cannot recover until some of the pain is taken and the debt mountain starts to be tackled. This is all very true and the UK banking and real estate market, if not bank shareholders which include the UK government, would benefit from an equally large serving of reality.

However, when you dig into the detail you realise that this is by no means a risk free trade for NAMA. Over half of the loans are secured on land and developments; given the current state of the Irish economy many of these sites are worth little more than agricultural land, and only 40% are income producing. A true mark to market on the loans based on the value of the underlying security probably shows a far bigger discount than 30%. But at least this is a start….

Pre-nationalisation Anglo-Irish Bank had loan loss provisions against its real estate loan book of c.3%. These figures expose how inadequate that was, yet many UK banks are still opearting with comparable loan loss figures. Granted the UK property market is in better shape than Ireland but the fact remains that every real estate loan book in the UK is still over stated. Until this issue starts to be addressed there is little hope that there can be any sustainable recovery in lending volumes in the property sector or a broad based market recovery.