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International Monetary Fund
National Asset Management Agency
burst real estate bubble
toxic commercial real estate loans
"What if god was one of us?" sang Alanis Moirisette, well I say "what if god was an economist?", because if you look at Spain and Ireland right now you might agree with me that he just might well be.
Spain and Ireland right now are a near perfect experiment for two different ways of dealing with a burst real estate bubble; both had bubbles of the same magnificent proportions (Ireland's was bigger in terms of hyperinflation but Spain was bigger in terms of over-development), and both have popped so dramatically and to such drastic effect on the economy and the country, but both have adopted completely different ways of dealing with the crisis making it a perfect economical experiment for the fascinated to study, observe and compare.
Ireland took the bull by the horns. In 2009 Irish finance minister Brian Lenihan tasked Peter Bacon to identify the scale of the Irish banking crisis. The resulting 'Bacon Report' eventually led to the creation of the National Asset Management Agency (NAMA) as a so-called 'bad bank' to buy up the toxic commercial real estate loans of the others banks.
This was good for three reasons:
It made the banks own up about the true extent of the toxic loans they were holding in order that they could sell them to NAMA.
It brought all the toxic loans into one place, so Ireland only had one troubled bank, one bank to recapitalise and one figure to work out recapitalisation costs on. The rest of the banks were then recapitalised and allowed to go back to some semblance of normality, without the hassle of the loans including hopefully to go back to lending.
And it gave international investors the confidence that Ireland had all its problems out in the open and being dealt with. What's more, because NAMA is a government entity set up to help the economy get back on its feet first, and a business second it is managing the loans in the best way for Ireland whereas commercial banks would constantly be gauging what was best for Ireland against what was best for their balance sheets.
The say an alcoholic needs to reach rock bottom before he can begin to recover and it is the same for a property crash. Creating NAMA allowed Ireland to appreciate the full extent of the banking/property crisis, to absorb how bad things really were and deal with it. Most people now believe Ireland has bottomed and is on its way back up.
Meanwhile Spain is still in denial. Spanish banks have millions of Euros worth of toxic loans on their books as it is, but the fear is that there are many more that they have yet to disclose.
According to Peter Bacon the failure of Spanish banks to face up to the likely losses on property loans is preventing them from escaping their troubles.
The crisis in Spanish banking, and the perception outside Spain that the banking crisis is out of control, is one of the main reasons why the country is lurching dangerously close to its own EU/IMF bailout, said Bacon.
"If you look at the drift in Spain, there is currently another attempt to stabilise the base of Spanish banks, and there is no confidence that the solution is at hand," he said.
An asset-management agency along the lines of NAMA would remove doubts surrounding the Spanish banks, he said.
"Painful as the NAMA outcome is, it is probably better in the longer run than the kind of approach that has been followed by Spain," he said.
However, it is not all peaches and cream with the NAMA approach. Probably one of the biggest problems with the approach, and what may well be the main reason behind the Spanish reluctance is the fact that once you go down that road of accepting all losses at face value, then you are stuck doing so no matter how big the losses become.
Irish banks had to be bailed out following the setting up of NAMA, not least because early estimates of future losses proved hopelessly unrealistic. NAMA paid an average discount of 58pc when it bought property loans from the banks, twice Mr Bacon's original estimate. It left gaping holes in the banks that ultimately had to be plugged by the State through recapitalisations.
However, buying the loans was only one part of the NAMA strategy; NAMA is now sorting through the loans it holds and deciding which debtors (mostly developers) it will work with and which ones it won't; deciding which businesses and developments will be profitable and doing whatever it can to help them including refinancing where necessary, and which loans will be pursued in the negative sense of the word.
This is another aspect that could certainly be of benefit in Spain. Spain has a much bigger problem with over-development than Ireland and most everywhere else, so it would certainly be good for it to have a central organisation managing which troubled developments go ahead and which do not.
But the biggest benefit of Spain adopting the NAMA approach would be bringing it out of its current state of denial. When the investment fraternity hear the government indices talking about Spanish house prices having only fallen 10-15 per cent they lose confidence because they know from other sources that the drop is much higher, and the same goes for when they see it imposing more and more unrealistic measures on its troubled banks.
Amid all this denial no one knows how bad things could still get in Spain, maybe the losses are nearly all ran through now, but maybe there is millions of Euros still buried and lying in wait to further cripple the system. Things might have gotten really bad really quick in Ireland, but at least we know everything it out in the open, and that from that point a plan has been/can be formulated to turn things round and get them running smoothly again – there is no talk of Ireland needing another bail out and there never has been. Spain needs to face up to the depths of its problem, and putting one bad bank in charge of all the bad loans would certainly help them to do so.
Liam Bailey is a UK based property expert, he follows the situation in Spain closely, including the bargains to be found in Polaris World resorts including Terrazas de la Torre now offering frontline golf-view apartments from 60k Euros that were previously over twice the price.
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