The economist who advised the Government on the establishment of the National Asset Management Agency (Nama) said the new body will clean-up the balance sheets of Irish banks and allow them resume lending to the wider economy.
Peter Bacon said the loan values of the assets, mainly development land and property, will be “set by reference to the market” and that it was possible to “offset the risks of potential errors” associated with paying too much, or too little, for the assets.
He said the Nama proposal faces up to the extent of Irish bank losses. This agency will buy problem land and property development loans at a discount from the six Irish guaranteed financial institutions in a bid to allow them resume lending.
“These losses exist. They are sitting there and the question is who bears those losses? In the particular format the Government are taking shareholders of banks in the first instance are going to bear the loss for the bad lending that their banks have undertaken for a number of years.”
He said as these losses are dealt with developers’ first call equity “is also going to get wiped out”.
The proposal assigns responsibility for the losses to where it should be assigned: “namely the borrowers in the first instance, bank shareholders in the second instance. And it cleans banks balance sheets and allows them to move forward and provide the kind of services that the economy needs if it is to recover from the deep recession.”
Speaking on RTÉ Radio's Morning Irelandprogramme Mr Bacon said Minister for Finance Brian Lenihan will bring forward legislation to compel the banks to participate, although he doubted any of banks would have refused.
He described the balance sheets of Irish banks are “sorely compromised” and said there was little real difference between the Nama proposal and nationalising the banks, saying nationalisation would not solve the bad debt problem but merely “change the name over the door”.
He said a partial, or even majority shareholding, rather than full nationalisation offered the State an “exit mechanism out of the ownership of banks in due course”.
Mr Bacon said the next steps were discussing the detail and implementation of the plan and the publication of legislation to establish the Nama.
Tánaiste Mary Coughlan told the Dáil this morning legislation governing the establishment of the new agency would be drawn up over the coming weeks and is expected to be ready before the Oireachtas summer break.
At the launch of Nama yesterday, Mr Lenihan conceded the Government may be forced to take majority stakes in the banks if the losses on property and developments loans are so large that they need additional capital from the State.
The Minister said the State’s purchase from the banks of risky property loans with a book value of between €80 billion and €90 billion may result in losses, forcing the lenders to seek more capital. He said in that case the State would invest more capital through ordinary shares, leading to the part-nationalisation of the banks.
Injecting further capital “might, depending on the circumstances, lead to a majority State position in the relevant institution,” he said, although he denied nationalisation was an inevitability.
Mr Lenihan said “the continued denial or postponement” of bank liabilities carried “a significant economic cost” to the country. “Postponing these losses, delaying these losses and rolling up interest on these losses – the extent of that cannot be sustained by our economic system,” he said.
He would not be drawn on how much the State would pay for the loans, saying this would be agreed following talks with the banks and an assessment of their bad debts. “We cannot in this particular exercise show you our set of cards today. We wait to see their position but we have to protect the taxpayer in the interest of the State,” he said.
He said the Government would pay “significantly less” than the loans’ current book value.
Mr Lenihan said the creation of the agency was not a bailout for the banks, but for the economy. He said that there was no suggestion that loans to developers would be deferred by Nama. “I don’t envisage that Nama will have a tent at any famous Irish racecourse,” he said. “As far as I am concerned this body is there to realise these assets and to deal with the debts.”
Shares in the country’s two main banks, Allied Irish Banks and Bank of Ireland, were lower in the first hour of trading today. AIB slipped over 6 per cent to €1.13 by 9.05am while Bank of Ireland dropped 9 per cent to 81.5 cent.
Last night Fitch became the second rating agency in just over a week to downgrade Ireland’s AAA rating, citing the “heavy toll” on the public finances from the severe economic downturn.