IMF warned Nama would not lead to significant bank lending

Flamed Diving · 08-02-2010 11:49pm #1

IMF warned Nama would not lead to significant bank lending

SIMON CARSWELL Finance Correspondent

Mon, Feb 08, 2010

THE INTERNATIONAL Monetary Fund (IMF) told Minister for Finance Brian Lenihan last April that the National Asset Management Agency (Nama) would not lead to a significant increase in lending by the banks.

The comments, which appear in internal Department of Finance documents released to The Irish Times under the Freedom of Information Act, were made by senior IMF official Steven Seelig who will join the board of Nama in May.

Minutes of a private meeting at the department between Mr Lenihan and IMF officials on April 29th last state that the “IMF (Mr Seelig) do not believe that Nama will result in significant increase in bank lending in Ireland”.

The meetings were held for the purposes of the IMF compiling its annual economic assessment on Ireland in the so-called Article IV report published last June.

The Government has maintained that Nama’s purchase of bad loans from the banks with State bonds would increase the flow of credit in the economy since the plan was unveiled last April.

Speaking at the publication of the Nama legislation last September, Mr Lenihan said Nama would “strengthen and improve” the funding positions of the banks “so that they can lend to viable businesses and households”. Taoiseach Brian Cowen had said the Government’s objective in restructuring the banks was to generate “more access to credit for Irish business at this critical time”.

The IMF endorsed the Government’s plan to recapitalise the banks and to clean up their balance sheets by establishing Nama.

In another internal document, the department repeats the IMF’s belief that Nama will not lead to significant lending, citing references to meetings with Ulster Bank and AIB for this conclusion.

While the IMF supported the policies on the banking sector and the public finances, it said the Government “faces a huge task that will take three to five years of very careful management”, according the minutes of the meeting with Mr Lenihan.

The IMF also expressed surprise at concerns raised by the EU Commission’s competition division over state aid rules, saying that it “did not agree that anti-competitive issues were as important as resolving the problem in the financial institutions”.

In a separate note on State-owned Anglo Irish Bank, the IMF queried the health of the bank’s non-land and development loans. However, the bank said the losses on these loans would be “nothing close” to those on the property and development loans.

In a briefing note on a meeting with the Irish Banking Federation, the IMF said it would encourage Nama “not to cave in to (sic) readily” to the banks on the haircuts on loans moving to Nama.

In an internal e-mail dated June 6th, 2009, sent in response to a draft copy of the IMF’s report on Ireland, senior department official Kevin Cardiff warned against making public any official estimate for the losses faced by the banks, saying that the department had not made this information public. “We naturally shared with the IMF team our informal views on the range of possibilities, but would be uneasy about seeing these formalised,” said Mr Cardiff, who has since been appointed secretary general of the department.

The IMF estimated in their published report the domestic banks would face losses of up to €35 billion, though the department pointed out this would be partly funded from operating profits and provisions already taken against some loan losses.

Mr Cardiff also said in his e-mail that the National Pension Reserve Fund, which was used to fund the €7 billion recapitalisation of AIB and Bank of Ireland, was “not necessarily the most appropriate structure for all recapitalisations”.

While supporting the creation of Nama, the IMF said taking over soured property loans was “not costless”. “It’s the only way you get through this thing – however, Nama may have to put money into assets to develop market interest in them,” the IMF said in its meeting with the Irish Banking Federation.

The IMF queried AIB selling some of its businesses during meetings last April, saying that the bank “assumed that the market already priced this in”. The bank has considered selling its stakes in the Polish bank Bank Zachodni and US bank MT as a way of generating cash for the business.

© 2010 The Irish Times

http://www.irishtimes.com/newspaper/frontpage/2010/0208/1224263954908.html

Surprised ye haven't discussed this, or if ye have, sorry for the double post!

So, yet another doubt thrown on the pile...

Liam Byrne · 09-02-2010 12:01am

Flamed Diving wrote: »

http://www.irishtimes.com/newspaper/frontpage/2010/0208/1224263954908.html

Surprised ye haven't discussed this, or if ye have, sorry for the double post!

So, yet another doubt thrown on the pile...

Ah sure, someone from FF probably told them they were pessimistic and wondered why they didn't commit suicide.

FF do what FF want/need. Facts and the good of the country are unnecessary distractions.

Red_Marauder · 09-02-2010 2:59am

I'm a bit underwhelmed by that article to be honest. It sounds juicy enough when you start reading it, but actually it's pretty tame stuff. We already know most of it.

I dont mean to de-rail the thread but the only thing interesting about the article was

The IMF queried AIB selling some of its businesses during meetings last April, saying that the bank “assumed that the market already priced this in”. The bank has considered selling its stakes in the Polish bank Bank Zachodni and US bank MT as a way of generating cash for the business.

Why would AIB want to sell such a profitable wing of its operations? Surely that is completely counter productive and contrary to all sorts of logic

Liam Byrne · 09-02-2010 3:54am

Red_Marauder wrote: »

Why would AIB want to sell such a profitable wing of its operations? Surely that is completely counter productive and contrary to all sorts of logic

Increase its chances of getting bailed out ?

Red_Marauder · 09-02-2010 4:01am

I don't know, the bank is already bailed out and guaranteed of whatever bailing out it will require into the future.

I just mean for logistical reasons, why would you consider selling one of the few healthy arms of a rotting corpse? The Polish wing is profitable, selling it in the current climate particularly just makes no sense.

Liam Byrne · 09-02-2010 4:15am

Red_Marauder wrote: »

I don't know, the bank is already bailed out and guaranteed of whatever bailing out it will require into the future.

I just mean for logistical reasons, why would you consider selling one of the few healthy arms of a rotting corpse? The Polish wing is profitable, selling it in the current climate particularly just makes no sense.

Who are we mortals to question the logic of a bank.

I told them I could afford to pay them back €XXX, so I wanted to borrow €YYYYY, and they offered me 2x€YYYYY at a repayment of 2x€XXX

Business logic would have suggested that they offer me only the amount that I could afford to pay back.

Nody · 09-02-2010 8:45am

Red_Marauder wrote: »

I just mean for logistical reasons, why would you consider selling one of the few healthy arms of a rotting corpse? The Polish wing is profitable, selling it in the current climate particularly just makes no sense.

Depends on what you can sell it for though; if you can sell it for say 20 times yearly profit you can take that cash now (discounted value over 20 years means it is worth even more then 20 years profit) and invest that into more profitable areas. This could to pay of expensive loans or other activities which you see would generate more long term profit; esp. if they don't expect to be able to expand the operations.

As for the report; anyone with a basic understanding of book keeping could see that NAMA would not help lending even before the banks admitting as much. It is scary in it self that so many people has bought in on the lie that NAMA is needed to get banks starting to loan out money again; when in realitity it is pure state aid to the banks paid by the taxpayers at a loss.

Amhran Nua · 09-02-2010 9:53am

Brian Cowen responds...

Taoiseach defends Nama claim on lending

THE TAOISEACH has defended his claim that the National Asset Management Agency (Nama) will increase the supply of credit into the economy despite the International Monetary Fund (IMF) saying it would not lead to any significant increase.

“People should contemplate what level of credit accessibility we’d have in this economy without Nama,” he said.

“It’s not just sufficient in itself obviously for credit flow, it’s certainly an important and necessary part of restructuring our banking system, of that there’s no doubt, in terms of improving as a location for funding of banking operations,” said Mr Cowen.

Mr Cowen has previously said that the Government’s objective in restructuring the banks through Nama was to “generate more access to credit for Irish business at this critical time”. Last September, the Minister for Finance expressed a similar view, saying it would lead to more lending for business and households.

Yesterday The Irish Times reported that the IMF told Minister for Finance Brian Lenihan last April that Nama would not lead to a significant increase in lending by the banks.

Responding to questions about the story at Engineers Ireland headquarters in Dublin, where he was launching Engineers Week 2010, Mr Cowen said Nama would make Ireland a better location for the funding of banking operations.

I mean for gods sake even the banks themselves admitted that NAMA wouldn't cause them to increase the credit supply, they are quite happy to sit there and be fed money by the Irish taxpayer.

The truth is that Nama was never likely to get credit flowing, and this has now been confirmed by the recent appearances of AIB and Bank of Ireland executives before an Oireachtas committee.

Despite the Government’s consistent claims that the banks were going to take the Nama bonds to the ECB as security for loans, it was clear before the Bill had even passed that this was never likely to happen. The Irish banks were already heavily indebted to the ECB, which had begun warning banks that they should not be dependent on it for funding.

For instance, in September ECB executive board member Jurgen Stark said the ECB’s lending “was not designed to counter funding problems at the individual bank level” – a strong hint that Irish banks needed to get ready to reduce, rather than increase, their reliance on ECB borrowing.

Rather than convey this reality, however, Government politicians repeatedly gave the impression Nama was a brilliant wheeze to get cheap European money flowing into Ireland.

So when approximately will NAMA get the credit flowing? We're not all that sure apparently...

JC: “When will it be? Will it be March, April, February?”

BC: “Well the answer is that Nama will be operationalised in the new year. The transfer of assets begins then. During the course of the six months you’re going to see the main part of that process implemented and arising out of that then you have the prospect of increased credit available . . . so during the course of 2010 we expect to see an improvement in the situation.”

JC: “So it’ll be the latter half of 2010 that credit begins to flow?”

BC: “Well, during the course of 2010, and in the meantime we have a system in place that seeks to ensure that banks are supporting viable business propositions.”

Right, so new businesses should have no difficulty finding credit in the meantime:

Banks' unwillingness to take a risk criticised
AN AWARD-WINNING chef has accused the banks of “smothering the sparks of economic recovery” after he and his business partner were refused a €150,000 loan to start up a new French bakery in Dublin.

Pastry chef Yannick Forel and his partner, Ruth Savill, plan to open the bakery on Moore Street and have lined up 25 staff to work in the business.

They invested €100,000 each in the venture but need another €150,000 to get it off the ground.

They are now looking for an investor after being refused a loan by Bank of Ireland, AIB and Ulster Bank. Unlike other owners of small businesses, who have complained privately about a lack of credit but declined to go public, Mr Forel and Ms Savill are prepared to express their frustration with the banks.

“The banks are no longer willing to take even the slightest risk in order to encourage new enterprises. A fantastic opportunity will have slipped through the nets because they are paralysed with fear,” he said.

The pair plan to produce 20,000 croissants, brioches and baguettes each day, using imported French flour, natural yeast and artisanal baking methods. They say wholesalers supplying restaurants and hotels have already agreed to take half their output and many staff have agreed to work for the minimum wage to help get things going.

Mr Forel, a winner of French national breadmaking awards, has extensive restaurant experience in France and has worked in the Brook Lodge Hotel in Macreddin, Co Wicklow, and Fallon Byrne in Dublin.

Time is running out for their plans after the loan refusals.

“Bank of Ireland strung us along, making positive noises for months. Then, after a year, they said no,” said Ms Savill.

You could fund four hundred thousand new businesses on a similar scale with the money being pumped into NAMA, or about 170,000 if the principals had no capital of their own. Food for thought indeed.

IMF warned Nama would not lead to significant bank lending

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