THE EU will probably have to include increased debt raised by the Government to buy bad property loans from the banks in its assessment of Ireland’s gross debt.
It has also stressed the importance of “political unity” in a European Commission report analysing possible solutions to the financial crisis based on Sweden’s bank crisis in the early 1990s.
“The Government will have to issue bonds to buy the loans and this debt in principle would be a public debt . . . There is nothing you can do about this,” said Daniel Gros, director of the Brussels-based think tank, Centre for European Policy Studies, yesterday.
Mr Gros made his comments following reports that the Government is lobbying Brussels to try to ensure the value of the assets purchased by the new National Asset Management Agency (Nama) can be deducted from the gross debt.
This would enable the Government’s general gross debt to remain relatively close to the 60 per cent of gross domestic product (GDP) limit that is set out under the EU’s borrowing rules.
The Government recently made a commitment to the European Commission to reduce its budget deficit from 10.75 per cent of GDP this year to below the 3 per cent deficit limit in 2013.
However, under the EU stability and growth pact rules, it must also keep its national debt below 60 per cent of GDP – a level Ireland will breach in 2010 when Eurostat predicts the Government’s gross debt will be 68 per cent of GDP.
Nama will buy problem land and property development loans with a book value of €80 billion to €90 billion at a discount from the six Irish guaranteed lenders in a bid to help them resume lending.
It has emerged that economist Peter Bacon, who advised the Minister for Finance on the bad bank plan, estimated a figure in his report to the Government on the possible write-off on the property loans to be purchased by the State.
Dr Bacon and a Department of Finance spokesman declined to say how much the Government would pay the banks for the loans.
The Government said it will pay “significantly less” than the the loans’ book value to reflect the fall in property values and at a level “sustainable for the taxpayer”.
Stockbrokers Goodbody and Davy have estimated that the banks would take a 15 per cent write-off or “hair cut” on the loans.
This means the taxpayer would pay the banks €76.5 billion for property loans of €90 billion.
Mr Lenihan has said the banks would not be able to offset against taxes any losses incurred on the sale of the loans to the State.
The Government plans to raise the money to buy the loans by issuing bonds, but has asked the European Commission to deduct the value of the property assets from its gross debt figure.
“In terms of how this is treated it is a matter for Eurostat or the commission,” said a spokesman for the Department of Finance, who confirmed the Government was in contact with Brussels about its plan to deal with toxic loans.
A commission spokesman said it couldn’t comment on whether it could change the way it accounted for a country’s national debt as it had not been fully notified about the Government’s plan.
However, in its analysis of the Government stability programme it has warned that commitments to banks could affect debt.
A separate commission report on the financial crisis seen by The Irish Times has recommended member states use the model followed by Sweden in the 1990s.
The Swedish crisis arose from a lending boom to the housing, commercial real estate and stock market, creating an asset bubble similar to the Irish experiences.
To deal with the bad loans in its main banks the Swedish government forced banks to write down loans, nationalised banks that were technically insolvent and set up a Government-backed “bad bank” to take non-performing loans off the books of the banks.
