Treating NAMA as an off balance sheet Special Purpose Vehicle means the Government's financial position will appear better, Sean Whelan writes.
The cost of funding NAMA will not be added to the national debt.
The European Commission’s statistical service, Eurostat, has accepted the Government’s method of treating NAMA as an off balance sheet Special Purpose Vehicle (SPV), which will not be included in the figures used to calculate the national debt.
The Government’s debt ratio is expected to be around 59% of GDP by the end of the year, a figure that is expected to rise to 73% or more by the end of next year.
The €54bn cost of finding NAMA would have added an extra 30% of GDP to that debt pile, taking it over the 100% mark by the end of 2010.
But today’s decision by Eurostat to accept the Government’s argument for keeping NAMA off the national balance sheet means the headline figure for Irish Government debt will appear comparatively low.
Under the EU stability pact, governments are supposed to keep debt under 60% of GDP. Ireland has been given five years to get the debt levels back below this figure.
Today’s decision to exclude NAMA from the national debt figure makes that task a lot easier – though it is just an accountancy technique, and the taxpayers will remain the ultimate guarantor of the NAMA debt.
The key to keeping NAMA off the books is a Special Purpose Vehicle (SPV).
This is a special legal entity, which will be separate from, but controlled by NAMA.
The so called ‘Master SPV’ will be the legal entity that actually buys, manages and disposes of the bank loans identified and valued by NAMA.
The money to fund the purchase of the distressed bank loans will come from Irish Government bonds cashed in at the ECB (with 5% subordinate debt to be paid by the banks if NAMA fails to make a profit).
But it is the ownership of the Master SPV that is the key to the Eurostat decision – because it will be majority owned by private investors. NAMA itself will own 49% of the SPV, which will have a capital of €100m.
Private investors – believed to be the main funds that invest in the Irish market – will be asked to come up with €51m to fund their share.
The master SPV can then set up other SPVs, which will handle the loan assets of individual banks (and any associated property collateral).
According to a letter sent by the Central Statistics Office to Eurostat, the aim of the SPV is to make a profit. According to the CSO the current target is a return of 45% over seven years.
Based on NAMA’s estimates, the SPV will fail to make a profit if the market value of the acquired assets increases by less than 10% over the seven to ten year life of NAMA.
So who gets the profits?
The private equity investors will be paid an annual dividend linked to the performance of the Master SPV.
On the winding up of the Master SPV, the private investors will only be repaid their capital if the SPV has the resources to do this. They will receive a further equity bonus of 10% if the SPV makes a profit. All other profits and gains from the Master SPV will go to NAMA, as it is putting up the money to fund the operation.
Because of the very large amount of money involved, NAMA will have veto rights over all decisions of the Master SPV and its subsidiaries – so as public body will have ultimate control over how the public’s money is spent.
But because the SPV is majority owned by the private sector, that money does not have to be included in the figures used to calculate the national debt.
It is off balance sheet accounting, and in reality, €54bn of borrowing is still €54bn of borrowing. But it does make the Government’s financial position appear better.
What will the financial markets think?
Well professional investors will not be fooled, but the Government is hoping that by effectively separating the ‘normal’ Government debt from the ‘special’ Government debt needed to rescue the banks, they will be better able to convince investors about the real state of the Irish economy and public finances.
And the Irish are not the only ones trying this line – the Irish scheme is closely modelled on one set up by the French government, and the Irish case was bolstered by German requests to Eurostat that its bank rescue scheme be treated in an off balance sheet manner so as not to inflate the German debt/GDP ratio.
Sean Whelan, Europe Correspondent
