THE GOVERNMENT has agreed to buy the highest risk loans in the banking system in a move that could at least double the national debt and lead to greater State ownership of the banks.
Minister for Finance Brian Lenihan announced plans in his Budget to create an asset management company to buy between €80 billion and €90 billion of property and development loans from the banks in a bid to kick-start lending and repair the banking system.
The National Asset Management Agency will be set up to buy the loans and the properties securing them at a discount. The loans amount to a fifth of all loans across the six Irish financial institutions. The company will be run under the control of the National Treasury Management Agency. The assets will be purchased at a discount “to reflect the loss in the value of the properties”, said Mr Lenihan, although he did not reveal how much the State would pay the banks for the assets.
Mr Lenihan said this would “result in a very significant increase in gross national debt”, but the cost would be offset over time from the sale of the assets.
He said that, if the debts were not recovered, a levy would be applied to the banks to recoup any shortfall.
Fine Gael finance spokeman Richard Bruton said: “Fianna Fáil has taken a massive €90 billion gamble on behalf of the taxpayer in bailing out the very property speculators and banks that dragged our economy over a cliff in the last few years”.
Labour leader Eamon Gilmore said the agency was being created “effectively to buy up the properties that were speculated on over the years of the boom”.
Assuming the Government pays a 40 per cent discount to buy bank loans of €90 billion, it would purchase the assets for €54 billion. This would double the national debt to €108 billion.
Mr Lenihan said the discounted price would lead to losses at the banks and that, if they need additional capital, the State would insist on taking ordinary shares. This could lead to part or full nationalisation of the banks, depending on the size of the losses incurred.