International evidence (World Bank and Financial Stability Institute) shows that for NAMA-style agencies engaged in either rapid disposal of assets or managing impaired assets to enjoy even limited success, a confluence of benign conditions is required. In the case of both rapid asset disposition agencies (Mexico, Spain, USA, China, Korea, Malaysia) and restructuring agencies (Finland, Sweden, Japan), the crucial factor required for a favourable outcome is a strong recovery, both in the property market and the wider economy.  Other favourable factors include:

  • Appropriate funding and appropriate powers (e.g. the ability to change management immediately, purchase assets, offer guarantees or counter- guarantees on behalf of restructured banks, grant long-term loans at subsidized rates or permit temporary regulatory forebearance) for resolving agency
  • Banks to be resolved were small banks which made it “politically easier” to resolve
  • The largest banks were sound enough to assist in resolving the smaller banks, albeit under significant state pressure
  • Non-performing assets were a small percentage of  entire banking system assets;
  • Deep and sophisticated capital markets
  • Adequate governance structures; professional management and extensive use of private sector contractors for asset disposal

The difficulties facing NAMA in terms of either rapid disposal of assets or managing impaired assets are compounded by the fact that, in the Irish case, these conditions are either not present or unlikely to emerge. More worryingly, when one compiles a list of unfavourable factors for the performance of these agencies, they all sound very familiar:

  • Assets transferred include politically connected loans which can be difficult for a government agency to handle
  • Lacklustre demand for real estate assets
  • Poor quality of underlying assets
  • Lack of funding for the agency
  • Inconsistent objectives for the agency: cost minimisation and rapid disposal of assets, on one hand and an objective to structure and time asset sales to minimise negative impact on the real estate market
  • Disparate set of assets due to unclear eligibility criteria
  • Weak legal framework (e.g. the debtor had to agree to the sale of the assets)
  • Controversy over incentive-based payment schemes for employees
  • Deficient framework for foreclosures and seizure of assets

It is clear from the above that if NAMA intends to facilitate developers to complete developments, it needs to be (i) well funded (ii) given appropriate powers (iii) free from political interference (iv) given strong legal backing, and (v) fortunate, in terms of the prevailing economic climate. The timing of asset disposal is a double-edged sword in the Irish context. International evidence indicates that the warehousing of assets in the hopes of obtaining higher prices later may not prevent prices from tumbling now, since the future supply of assets will be discounted in current prices. On the other hand, selling assets rapidly may lead to substantial losses, but has in certain cases established floor prices that promote a speedier recovery from the economic crisis. However, given the oversupply of Irish residential property and the dubious quality of unfinished ghost estates, a rapid sale would seem like a high risk strategy.

Declan Curran