THE GOVERNMENT may 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 for Finance has conceded.
Brian Lenihan 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.
However, he said that nationalisation was not an inevitability.
The Minister was speaking at the launch of the National Asset Management Agency (Nama), which will buy problem land and property development loans at a discount from the six Irish guaranteed financial institutions in a bid to free up lending.
Economist Peter Bacon, who advised on the planning of the bad loan agency, said that bank nationalisation was not a preferred option but that majority stakes in the banks could be advantageous.
Dr Bacon said that Nama “squares up” to the banks’ losses and to the pain of recognising them. He said the pain belonged to the shareholders and the banks, which will take the first loss on any write-offs of loans.
He said that the agency would remove “the question mark” over the banks’ capital requirements.
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.
Mr Lenihan said that he would also examine proposals to stop the banks lending to speculators.
The Minister 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 that the Government would pay “significantly less” than the loans’ current book value.
Stockbroker Davy estimated that the banks would write off up to 15 per cent in the transfer.
This would mean that the State would pay €76.5 billion for loans of €90 billion, which amounts to a fifth of all loans in the banking system.
A figure of €50 billion was contained in a press release circulated by the National Treasury Management Agency (NTMA), as the size of a bond to be raised by Nama.
However, the NTMA and Mr Lenihan said the figure was included for “illustrative” purposes to dismiss incorrect speculation on the potential scale of State debt as a proportion of the value of the economy.
In the Dáil, Fine Gael leader Enda Kenny questioned Taoiseach Brian Cowen on how much the State would pay for the loans. “How much does the Government expect the Irish taxpayer to have to pay for the acquisition of dodgy debts to banks? Is it €90 billion, €50 billion or €40 billion? The Government is asking us to give it another blank cheque.”
Mr Cowen said the banks would “have to take the associated losses” and that no money would be transferred until the estimated cost of Nama was undertaken.
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, fell sharply in response to the bad loan plan and after the downgrading of 12 banks in the country by credit rating agency, Moody’s.
Fitch became the second rating agency in just over a week to strip Ireland of its top AAA rating, citing the “heavy toll” on the public finances from the severe economic downturn.