Party's plan close to Nama critics' alternative model

ANALYSIS:AS ALTERNATIVES to Nama go, the Labour Party's proposal to nationalise Bank of Ireland and Allied Irish Banks (AIB) in full on a temporary basis is what many critics of the Government's plan cite as their favoured option.

Under Labour’s plan, all shares in Bank of Ireland and AIB would be acquired by the State at a price set by an assessment of the level of bad debts in each bank and the availability of the bank guarantee.

This, the party believes, would avoid the complicated and risky valuation process by which the Government will decide how much it pays for loans owed by developers with a face value of €90 billion under the Nama “bad bank” plan.

Once the banks are nationalised, the party would then create a central asset recovery agency called an “Asset Recovery Trust” to deal with their toxic loans.

The loans would be transferred to the trust at the current market value and not at the “long-term economic value” – the price above market value at which the Government will buy loans.

The Government has ruled out full nationalisation, saying that the banks were “survivable entities” and that shareholders will not be wiped out based on forecast losses.

Labour fears that by seeking to avoid full nationalisation, the Government will overpay for the loans because the more the State pays, the less capital the banks will need and the smaller the Government’s stakes will be in each.

Nationalising the two banks and transferring their toxic loans to a single entity, which would also be owned by the State, reduces the risk of overpayment as “one State-owned entity would be buying a loan from another”, Labour says.

The party plans to recover the cost of the bad loans by reselling the banks on the stock market through flotations at a later date.

Party leader Eamon Gilmore declined to say how long the banks would remain in State ownership under its plan, saying it would need to wait until the banks are “functioning again”.

Nama involved a review after five years, he said; “I don’t think anyone can see further than that.”

The party’s finance spokeswoman Joan Burton said she was unable to say how much Labour’s plan would cost, saying the party needed to see the scale of the losses on the Nama-bound loans.

Labour is not proposing to default on any repayments of debts to investors in the banks’ bonds. But the party says it will renegotiate debts owing to bondholders to try to seek a writedown of those liabilities.

Stockbroker Bloxham, which last week estimated that the Government would pay a 23 per cent discount on the loans’ face value, estimated that nationalising the two banks would cost €21.5 billion. This, the stockbroker said, would include €12 billion in higher State borrowing costs due to the increased risk of owning the banks.

Ms Burton dismissed this, saying that uncertainty over property loans across the banks had increased the State’s borrowing costs following the nationalisation of Anglo Irish Bank last January.

She said stockbrokers whose estimates on the discount range from 15 to 25 per cent were “self-serving” and wanted the discount to be as low as possible to maintain the banks on the stock market.

Nationalisation is one way of circumventing the difficult valuation of bad loans, but the cost and effect of this option are still unclear.