When €23bn is probably not enough...

Posted by Morgan on 17th Sep 2009
The Irish Government have announced that NAMA will acquire real estate loan with a face value of €77bn for €54bn, report Property Week.


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.

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