After weeks of fevered speculation, the price that the Irish government is to pay the banks for their mountain of bad property loans was finally revealed last week.
The National Asset Management Agency (NAMA) will pay €54 billion for loans with a face value of €77 billion the books of the banks. That is a discount of 30 percent, as predicted in this column last week.
But there's a big question hanging in the air. Is the discount big enough?
NAMA is the state body set up by the government to take the bad loans out of the Irish banks and stop them going bust. The €54 billion it will be paying is €7 billion more than the current market value of the properties underlying the loans, which is €47 billion, Minister for Finance Brian Lenihan said.
NAMA will be paying the extra to reflect the long-term economic value of the assets. This is the purpose of NAMA, which aims to hold the loans long enough so that the property market can recover and the loans can be repaid, a process which many experts think could take 10 years or more.
The reaction to the minister's statement was mixed. Ordinary taxpayers -- and it is Irish taxpayers who will be underwriting the €54 billion that the European Central Bank will be providing to enable NAMA to buy the loans -- were angry and resigned.
Angry because they have to carry the can for the incompetence and greed of the builders and bankers who created the mess. And resigned because most people here now realize that the banks have to be rescued if the current economic slump is not to turn into a crisis of Third World proportions.
The reaction from the leading voices in Irish commercial life was largely positive. They believe that it is vital to get liquidity into the system so that the banks can start lending to business again. At the moment there is an effective credit freeze here, and the result is that the economic downturn has turned into a slump where little is moving and the economy is contracting.
The reaction from bank shareholders was one of relief. Instead of total wipeout there is now a chance that the banks might not only survive but begin to recover. The result was that bank share prices rose sharply after the minister's statement, although they are still a small fraction of the price they were two years ago.
To many this share price jump was a clear indication that the 30 percent discount that NAMA will be applying is not enough and the banks have got off lightly. But the 30 percent was not a surprise to anyone.
If it had been any higher, the lower amount paid to the banks for their loans would have left them needing recapitalization on a huge scale. And that would have meant nationalization, a path the government is determined not to follow, although it is something that may yet be necessary on a temporary basis before all this is over.
Lenihan told the Dail (Parliament) that property prices here would have to recover just 1 percent a year over 10 years for NAMA to pass break even. Which sounds reasonable enough, if you don't think about it too much. But if you do think about what is involved, large holes quickly open up in Lenihan’s projections for NAMA.
One of the reassurances that he offered the Dail was that the €77 billion in bad loans that NAMA will buy actually represents much more in property. This is because developers would normally have got a loan from the bank for 75 percent of a project and would have been required to put up the other 25 percent themselves, he said.
So the real face value of the property involved was actually over €100 billion, not €77 billion, and they were the assets NAMA would have as security when it buys the loans for the discounted price of €54 billion. This fits more or less with the statement by Lenihan that NAMA's current valuation of the loans assumed that prices have fallen by 50 percent since the peak in 2007.
All of which sounds impressive and reassuring. But there are three big problems with this reasoning and with NAMA in general.
The first is that it is nonsense to suggest that most developers had to put up 25 percent of the cost of a project in cash when they got a bank loan. What most of them did was include another of their properties as security for their new loan.
And the problem with that is that these other assets -- land or buildings -- are now also worth just a fraction of their peak value. Cross collateral loan arrangements were the name of the game, not cash. So the notion that there is a 25 percent hidden bonus in the NAMA plan is a pipe dream.
The second problem with NAMA -- and the hope that it can show a profit after 10 years -- is the assumption that the property market here has now hit bottom. As far as I can see there is no reason to make that assumption.
In fact I think it's going to slide another 20 percent or 30 percent from where it is now, given the rate at which we are losing jobs, the real economy is contracting and pay rates are falling. We're in for a very tough few years ahead, all of which will mean that selling property will continue to be very difficult unless prices are very, very low.
The recovery, whenever it comes, will then be built on that much lower base. Which means that, even at a 30 percent discount now, NAMA is paying far too much for the loans it is buying.
The third problem is even more fundamental. It is the belief underlying NAMA that property around the country is going to recover to even half of its value at the peak of the boom.
The evidence I see is that some of it will. But a huge amount of it will never recover.
There are many stories in the papers and on TV these days of new houses that are being sold at half the price they were selling for just over a year ago. Typically these are good houses in newly built estates on the edges of towns in counties like Kildare, Westmeath, Longford and Roscommon. The further away from Dublin, the bigger the discount.
Some buyers are emerging for these houses at the moment, but to get a mortgage you need to have a state job or be a professional who is not involved in the construction sector. If you're an ordinary worker in the private sector it's very difficult to get a mortgage.
And the axe will fall on state jobs and state pay (now an average of 25 percent above the private sector) in the next year or two, so there will be fewer of those buyers in the future.
But those houses are the bright side of the picture. On the dark side are all the unsold new houses that are not so good or are not in very attractive areas. There are thousands and thousands of them around the country and even close to Dublin, and even a 50 percent price cut is not selling them.
On TV here last week there was a very telling report on development sites that cost a bundle and are now virtually worthless, except as farmland. An example would be the proposed Downshire estate on 16 acres outside the pretty town of Edenderry in County Offaly, on the extremity of the Dublin commuter belt.
The land was bought a couple of years back for €14.5 million, and it has planning permission for 232 residential units, shops and so on. But the site is now scrub.
There is no demand for new houses in Edenderry (there are other estates which are already completed) and the developer of Downshire has been told by the local real estate expert that the current value of the land is €1.4 million -- a 10th of what he paid for it.
Another site in Offaly has dropped in value from €11.5 million to €1.1 million -- and there are many similar examples.
Even more drastic was the TV report from the proposed Carriglass estate on a 600 acre demesne around an old manor house near Longford town. Here there were plans for up to 300 homes, a few of which have been started, a golf course and a hotel, modeled on the luxury Mount Juliet golf resort in County Kilkenny.
Again, it's now abandoned scrub land, with weeds growing up around the half built walls of a few houses. The bank that financed the land is now owed €40 million by the developer, all work on the project is stopped and is unlikely to resume any time soon, if ever.
The fact is we have too many hotels in Ireland already (40 percent too many hotel bedrooms, all tax driven), and in a recession who can afford to buy weekend golf lodges in Longford?
This is the reality all around Ireland now. Abandoned building sites, estates of unsold houses, developers gone bust.
The residential market is a nightmare, and the commercial market is as bad (20 percent of all office space in Dublin is now vacant, and half finished new office blocks are an eyesore in the city). The developers behind all this stuff are bust, and without NAMA the banks that backed them would be bust as well.
These are the "assets" that are now going to come on to NAMA's books. Those empty fields beside villages in Offaly, with weeds and a few scattered concrete blocks, are supposed to be worth millions.
It's not a question of whether they will increase in value by just 1 percent a year over the next 10 years. The real question is, will they ever be worth anything?