# NAMA does not mean the State is borrowing from the ECB



## Protocol (28 Sep 2009)

I have a feeling that some people think the Govt are borrowing from the ECB to pay for NAMA.

This is not the case.

The ECB does not lend to Govts. This is to protect its independence.

The ECB lends to comm banks.


NAMA will buy "assets" from the banks, as in the mix of loans. It will pay for them by issuing NAMA bonds to the banks.

The State will pay interest to the banks on these banks.  I'm not 100% sure about the interest rate, ECB + 0.5% variable maybe.


The banks can then, if they wish, use these low-earning assets on their balance sheets as collateral when getting a loan from the ECB, at the ECB rate, 1% currently. The loan can last for a year max.  The hope is that they lend on the funds borrowed from the ECB.


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## z109 (28 Sep 2009)

Thank you, thank you for pointing that out. I am sick to the back teeth of people who should know better (Willie O'Dea, I'm looking at you, and you can put the gun away. You're a short man with an odd accent and nobody is impressed) saying that the ECB are giving us money or lending it to us or digging us out. 

We are paying the full rate for short-term floating rate notes (FRNs) as it looks like these bonds will be. The government will pay the banks 1.5% a year (currently) with the banks swapping them at the ECB and paying 1%. The ECB will apply a haircut to the bonds of 0.5% as they are less than a year in duration (being FRNs with a reset of six months as best as anyone can gather, the government haven't actually managed to say anywhere what the bonds are!).

So the sums are:
51.3 bn @ 1.5% - cost to government 769.5 mn/year
51.3 bn @ 0.5% haircut = ECB repo value of 51,043.5 mn
1% of 51,043.5 mn = 510.435 mn/year cost of ECB funding to banks

Profit for the banks = 259.065 mn/year...

So, not only are we taking the banks loans off them at more than market value, but we are paying them for the privilege because we are essentially broke and have to give them an interest bearing IOU.

The ECB is a complete red herring in this. It has been introduced to give a veneer of respectability to the arrangement and to encourage a pro-Lisbon vote.

Now, I am going to vote Yes on friday anyway, but NAMA pushes me so close to the edge... the spin about the ECB even closer. Roll on the european super state. I can't bear to be governed by these idiots any longer. Joe Jacobs come back, send me some cyanide XXXXXXXXXXXXXXXXXXXX this time...


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## Brendan Burgess (29 Sep 2009)

Hi Protocol

If the ECB was not there could NAMA go ahead? 

The banks would have bonds from the Irish government paying 1.5% interest. These probably could not be sold at par on the open market. 

So the banks would have no cash to lend to the Irish economy. 

So I suppose that NAMA could go ahead but it would not achieve one of its main aims of providing liquidity to the Irish economy. 

I fully realise that just because the banks have cash, it does not mean that they will lend it on. But if they didn't have this ECB cash, they would not be able to lend it on.

Brendan


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## Protocol (29 Sep 2009)

Fair point.

The ECB is indirectly (or directly??) facilitating NAMA by accepting the NAMA bonds as collateral for loans to comm banks.


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## z109 (29 Sep 2009)

If the ECB was not there, we would have our own central bank. We would likely be monetizing debt issuance (quantatively easing), inflating money supply, and reducing the exchange rate of the punt. There is no reason the government couldn't issue IOUs directly as money in this situation either (there is nothing to stop even local governments doing it - the state of California, for example, is issuing IOUs in lieu of public service pay. The IOUs are accepted as money in the shops...).

Course the banks, with their foreign currency liabilities, would probably go bust.

I don't think the NAMA bonds are put together to be sold, just to be repo'd. As you say, there is a better deal on offer from the ECB at the moment. This *could* change in the future, in that the interbank market could offer a better deal, but I think it more likely that the ECB will offer no deal at all and the banks will have to look to the interbank market for funding (based on Herr Stark's missive: http://www.ecb.int/press/key/date/2009/html/sp090915.en.html ).


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## Duke of Marmalade (29 Sep 2009)

I think far, far too much is being made of this repo facility. Banks currently have no problem getting liquidity from the ECB. But by the ECB stating that they would be acceptable as collateral if required it effectively underpins their value on the banks' balance sheets. 

These would NOT IMHO command par in the open market. This IS IMHO a very good deal. And another point which BLe has pointed out, these are pretty poor perfoming assets from the banks' point of view and so they will have a great incentive to supplement them with higher performing loans i.e. to lend to the real economy, which is the whole point of the exercise.


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