Q & A

What is the National Asset Management Agency?Its a new semi-State agency that will buy property loans that have gone bad off the banks. It will be part of the National Treasury Management Agency which manages the national debt.

Why has it been set up?

The bad property loans are so large that they have overwhelmed the banks, and impaired their ability to function normally.

The Government argues the banks must be cleaned up and properly functioning if the economy is to recover.

How big is the problem?

The current estimate for the bad property loans on the banks’ books is between €80 billion and €90 billion. But the Government will buy the loans at a discount to reflect the fall in land prices and other issues.

How much will it cost the taxpayer to clean up?

A lot. One way or another it will be expensive. The upfront cost depends on the discount at which the banks will be forced to sell the loans.

Estimates of the average discount range from 15 per cent to 40 per cent. But there will be other indirect costs.

Because the banks will be paid with Government bonds, the cost of the scheme will go directly onto the national debt which has implications for the exchequer finances.

Debt servicing costs are predicted to consume 18 cents of every euro taken in taxes by 2013, and that’s not including the additional borrowing taken on by Nama which could run to tens of billions.

The other potential cost to the taxpayer is that if the banks are forced to take a very big discount, it will erode their capital base and force another recapitalisation by the taxpayer.

The discount is obviously the key to this, so why won’t the Government disclose it?

The Government cites commercial sensitivity, but it’s possible they simply don’t know what the discount should be.

What will the banks pay for being rescued?

In theory, the banks pay by being forced to sell the loans at a discount that is sufficiently big to allow Nama make a profit on the loans and assets over time.

In addition, if Nama ends up making a loss over its expected 10-year life span then the banks will be levied for the difference.

Bank shareholders also run the risk of seeing the value of their shares fall further if the Government has to take a bigger stake in the banks to support them after they write-off their losses on the loans.

What about the developers who took out the loans?

The Government says that on average developers put up about 30 per cent of the cost of projects and borrowed the rest from the banks. They will have lost this money.

Will Nama get their assets?

It will be open to Nama to take possession of the land and other assets that underpin the loans if the developers cannot service them.

Will it be possible for developers to buy back their assets from Nama at a lower price later?

No mechanism to prevent this has been disclosed.

However, the Government said yesterday it was looking at curbs on bank lending for property speculation.

What is the upside?

The establishment of Nama may resolve the banking crisis. It will also put the State firmly in charge of the property market – in particular development land – and thus is in a position to undo some of the damage of recent years.

And the downside?

The costs are enormous and may yet beggar the State.

There is no real clarity at this stage about how Nama will be run, who will operate it, and how open it will be to political interference.