Airplanes may now be back in the sky over Ireland, but the country's economy is still on a knife-edge. When Greece's economy went into freefall, then Spain and Portugal took a hit, speculators predicted that Ireland which, along with Italy, is another member of the PIIGS group of European states with high levels of government debt might be next. Now, as we wait to see whether the $1 trillion rescue package announced on Monday can stop the contagion, Ireland's attempt to stabilize its troubled banking sector by creating a fund that will take on the toxic loans from five of the country's main banks is facing greater scrutiny than ever before.
By the time the last transfer is made in February 2011, NAMA will hold €81 billion ($100 billion) of toxic debt, roughly equal to 50% of Ireland's total economy. It will potentially become the country's largest landowner, with a portfolio including many of Ireland's hotels and a number of notable landmark buildings. The toxic bank option is one that several nations considered at the start of global financial crisis and then dismissed as a bad idea. In Ireland, the risk that the experimental scheme could wreak even more havoc on the country's frail economy has many worried. "NAMA will bankrupt Ireland," says economist and commentator David McWilliams. "It is forcing us to borrow from tomorrow to pay for yesterday and, in the process, destroy the opportunities of today."
As NAMA chief Brendan McDonagh revealed on April 13, two-thirds of the bank's distressed loans are in default meaning that NAMA's primary duties may be those of enforcer or bailiff. In the case of the many uncompleted and abandoned "ghost" real estate developments now littering Ireland's landscape, McDonagh has warned that NAMA may also have to play the role of demolition man: "We may well be faced with the very difficult decision of perhaps knocking down certain developments," he told a government committee, putting the blame on banks for "a reckless abandonment of basic principles of credit risk and prudent lending."
But even that primary goal of the NAMA experiment to encourage Irish banks to lend again is in dispute. While the International Monetary Fund (IMF) is broadly and publicly backing the idea, it emerged in February that when the plan was first proposed, the IMF told Irish Minister for Finance Brian Lenihan that it did "not believe that NAMA will result in significant increase in bank lending in Ireland."
The factors that initially convinced the Irish government to consider the relatively untested option of setting up a toxic bank when the global banking system was imploding back in 2008 seemed compelling enough. "The difference between Ireland and elsewhere is that what we had here was essentially an old-fashioned property bubble," says Eoin Dorgan, communications officer at Ireland's Department of Finance. "So, while debts in the U.K. and U.S. were based on complicated financial instruments that were very difficult to value, we could just base our valuation on the collateral, which was the land." So, the government decided that if Ireland was to avoid the chaos that Greece and other teetering euro-zone economies face now, it needed to do something radical. "It made sense for us to do something direct and up-front by creating a 'bad bank' to bring certainty to the market," says Dorgan.
Among the wider Irish population, however, the argument for NAMA has never been won. The blogosphere buzzes with talk of NAMA-geddon, while radio talk shows have been fizzing with white-hot indignation. "I am so angry, I am beyond outrage," one caller seethed in a recent phone-in devoted entirely to hurling abuse at NAMA on National Radio Station RTE. "What they are trying to do is to offload all this debt on to the taxpayer," fumed another.
Local Irish commentators warn that, despite bargain basement discounts of around 50% on the distressed loans, the NAMA acquisitions may be dangerously overpriced: "It's now emerged that the loans are so bad that that they are not salvageable," says economist David McWilliams. "There are land deals out there that have collapsed by as much as 98%. Saving them is just a monumental waste of money and could tip over the whole economy." Even if NAMA's estimates of the current value of these loans prove realistic, the extra borrowing necessary to acquire them will increase Ireland's total debt by a third and take generations to pay back.
At the very least, Ireland's toxic bank is a giant fiscal leap into the unknown. The crisis spreading through the euro zone which has caused fluctuations in the rates charged on Irish sovereign debt, pushing it at one point last week to its highest levels since 2008 has made it even more perilous and uncertain. If NAMA ultimately succeeds, it will be hailed as one of the boldest steps any country has taken in the face of the global banking crisis. If it fails, plumes of economic ash will blanket the country for decades to come, choking any hope of resurgence and recovery. And this time, nobody will be able to blame a volcano in Iceland.