Ireland to spend 54 billion euros for “bad bank”

September 16, 2009

A pedestrian passes a branch of Allied Irish Bank in London August 14, 2009. By Carmel Crimmins and Andras Gergely
DUBLIN, Sept 16 (Reuters) – Ireland will spend 54 billion euros on resuscitating its financial system and economy after a brutal property crash, ramping up its national debt and leaving the door open for further capital injections into lenders.

Finance Minister Brian Lenihan told parliament on Wednesday that the government would demand a 30 percent cut for parking commercial property loans with a nominal value of 77 billion euros in a state-run “bad bank.”

He did not spell out the capital impact from the writedown on individual lenders but Allied Irish Banks, seen by many analysts as the most likely candidate for a state bailout, said it would be able to raise sufficient funds internally.

AIB said it could tap equity shareholders, strategic investors and asset sales to raise 2 billion euros over the next year and a half and said it was confident that the 24 billion euros of assets it will transfer over to the National Asset Management Agency (NAMA) would be discounted below the industry-wide rate of 30 percent.

“I think there’s a good chance that they can raise that sort of money,” said Sebastian Orsi, analyst with Merrion Stockbrokers in Dublin.

Bank of Ireland, the country’s other main listed lender, said it would update the market at 1100 GMT on Thursday. It will transfer 16 billion euros worth of loans to NAMA.

Lenihan needs to get the banks lending again to help pull Ireland out of western Europe’s worst recession.

In return for their loans, many of which were written when Dublin real estate valuations surpassed property prices in Manhattan and Moscow, the banks will get government-backed bonds that they can cash with the ECB, boosting liquidity.
Controversially, the government is paying above the market price for the loans, which Lenihan put at 47 billion euros, fuelling criticism among economists, opposition politicians and the wider public that the plan leaves taxpayers in the lurch.

“I think a 30 percent discount is being extremely generous,” said Jim Power, chief economist at Friends First. “I would have thought the appropriate discount to be about 60 percent but realistically I was hoping they would go for about 40-50 percent.”

The bulk of Lenihan’s speech was delivered after the main Irish equity index had closed. Shares in Allied Irish Banks finished down around 2.4 percent and Bank Of Ireland closed 1.2 percent weaker, outperforming a general market that was up 1.7 percent.

The spread between Irish and German 10-year bond yields was little changed at around 154 basis points.

“The citizens of this country are understandably angry about the state of the banks,” Lenihan told the special sitting of parliament. “(But) the public understands we cannot have economic recovery unless we fix our banking system.”

Government approval ratings are at record lows amid widespread disquiet over Ireland’s transformation from “Celtic Tiger” economy to the euro zone’s weakest link on the back of a burst property bubble.

Lenihan said property prices, which have already fallen by half since their 2007 peak, would have to rise by less than 10 percent over the next 10 years in order for NAMA to break even.

But some economists have warned that the Irish housing market has further to drop and may stagnate for years to come.

“This is dangerous territory and we could live to regret it,” Richard Bruton, finance spokesman of the main opposition party, Fine Gael, said of Lenihan’s plan.

Nationalised lender Anglo Irish Bank — a poster child for the excesses of the boom years — will transfer 28 billion euros worth of loans to NAMA.

Building societies Irish Nationwide and EBS will transfer 8 billion and 1 billion respectively.

For a compilation of Irish government documents on NAMA, please click here.

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