Time will tell if this bad bank was the best option
As toxic bank Nama reveals its millions of pounds of holdings in Northern Ireland, Emmet Oliver examines its possible outcomes
The key to the success or failure of Nama is the price of property and the key to that is economic growth. At this point virtually no one has visibility on either.
â€¢ The optimum outcome for Nama
Under this scenario, Nama would return a profit of at least €3.9bn (£3.4bn) after repaying all its liabilities using the money generated from assets sales. This scenario is based around a decent recovery in property, where banks start lending again and the supply of new housing is kept in check. It would probably also involve government incentives aimed at property ownership, like mortgage interest relief. Effectively, in this instance, Nama would have paid the banks for the €72bn (£63bn) of loans it bought at a discount, but also managed to generate additional money from the sale of properties to leave the agency with a welcome surplus.
In that case, the agency would go into a voluntary liquidation and any residual value left on its balance sheet would accrue to the state.
This is only likely to happen if the property market turns up over the next eight years. Under a business plan released last year by Nama, a 10% uplift in the property market - from November 2009 prices - must take place for such a profit to occur. But the big question is whether it will be possible for prices to be ahead of 2009 when the full impact of the property downturn had still not happened by that point.
Having said that, eight years is a long time and Nama will be confident that even with further budgetary adjustments, the outlook for commercial and residential property should start to turn long before this. That is more likely when it comes to commercial property than residential.
Nama has one advantage in that its portfolio is not solely Irish and every year that its Irish assets fall in value, some of this damage is offset by gains in its UK and European portfolios. Ultimately, this could be the strongest protection Nama has from a falling Irish property market.
According to Nama's own figures, 38% of the portfolio it took over from the banks is situated in the UK and this market is proving very resilient. In addition, the Nama portfolio is concentrated in the London and south-east market where prices could recover strongly.
â€¢ The pessimistic outlook for Nama
In this scenario, Nama expects to make losses of €800m (£701m) However, losses in a worst-case scenario - similar to a bank stress test - are likely to be far higher.
Nama believes it can break even once it gets what it calls "long-term economic value" for its assets. This concept is controversial, but put simply is the kind of price assets normally sell for, according to historic norms. It also assumes that banking conditions are routine and not stressed like they are at present.
Nama claims in its worst-case scenario it will fall short of "long-term economic value" by 10%. It is, of course, possible that it could fall a long way short of this.
The Irish assets could be hugely overvalued, even eight years from now. If the land component in particular falls once more and doesn't stage any kind of recovery, Nama could be looking at losses of several billion euros.
If that happens it has two defences. One is that it won't pay banks all the money promised.
The second defence is more controversial - it can levy the banks with a tax on their revenues and recoup the money.
The danger here is that the banks will simply pass this onto customers.
It's likely to spook investors in the banks and dent their share prices.
With the Government owning large segments of the banking sector, the main loser of such a levy would actually be the state itself.
â€¢ The neutral outcome for Nama
This is probably the most likely outcome. It means Nama would simply get long-term economic value for its assets, according to historical averages, but no more.
It would mean the property market over the next few years would increase probably by around the rate of inflation. It would also mean that house completions would remain low and the Government would broadly stay out of the market.