Dublin to take on Irish bank bad debts [toxic assets]

The Financial Times ^ | 9/16/2009 | John Murray Brown

[bruinbirdman]

The Irish state will pay €54bn to take over bank debt worth €77bn to cleanse the sector’s toxic assets and encourage renewed lending to businesses, Brian Lenihan, the finance minister, said on Wednesday.

Opening the second reading on the bill establishing the National Asset Management Agency, Mr Lenihan said the so-called bad bank “would ensure we avoid the Japanese outcome of zombie banks that are just ticking over and not making a vibrant contribution to economic growth”.

Under the plan Nama will issue the banks with bonds and subordinated debt to the value of €54bn ($79bn, £48bn) to take over distressed bank loans.

Mr Lenihan said the market value of these loans was about €47bn, representing a 50 per cent fall in property prices since the peak in 2007. Nama was paying an average 30 per cent discount to the original value of the loans on the banks’ books, and “strikes a balance between reflecting the long-term potential of these assets while minimising any potential risk that Nama will make a loss”.

He warned “the evidence from property busts in other countries shows that the longer the bankers and the borrowers are allowed to deny the reality of the losses they face, the greater the ultimate cost to the taxpayer and the greater damage to the economy”.

Mr Lenihan sought to highlight the social role that Nama could play in future, indicating government agencies might be given “first option on disposals” of the properties of which the agency takes possession. He pointed out: “These bodies have sometimes been held to ransom and have had to pay inflated prices for projects such as school extensions and playgrounds.”

Richard Bruton, finance spokesman for the conservative opposition Fine Gael party, said: “If we get this wrong we will undoubtedly prolong the recession and increase . . . jobs lost.”

Trade unions staged a rally outside parliament earlier. Meanwhile, Dermot Desmond, the Irish millionaire financier, warned in an article in the Irish Times that “Nama as conceived will do untold long-term damage to Ireland. It will result in paralysis for decades to come”.

Much of the criticism of the plan centres on concerns the state is overpaying the banks for the loans.