Source : Business Times – 11 Aug 2009
It will create agency to buy up bad property loans at discount from banks
The Irish government, faced with a firestorm of falling property prices, is trying to prevent a national drama from becoming a disaster by providing huge guarantees to the loan market.
The figures speak for themselves: house prices, which began to boom on the back of the so-called Celtic tiger economy in the mid 1990s, have fallen by 30-40 per cent from a peak in 2006 and are continuing their downward spiral.
The government is now working on a scheme to provide support of 90 billion euros (S$185.8 billion), an astronomical sum working out at about 22,500 euros per head for Ireland’s population of just four million people.
The plan is to create a National Assets Management Agency (NAMA), which would be a so-called ‘bad bank’ to buy up bad and doubtful property loans at a discount from the country’s ailing banks.
Lawmakers in recession-hit Ireland are cutting short their summer holidays to discuss legislation to set up the bank, which the finance ministry sees as one of the most far-reaching economic measures in the country’s history.
Under the scheme, the government is to take on loans equivalent to roughly a third of Ireland’s gross domestic product (GDP) of 182 billion euros in 2008.
Most of the loans are in Ireland, but some have been made for activities in Northern Ireland and Britain, and in places far farther afield.
The property crash has generated widespread distress in Ireland.
But banks have so far not enacted widespread default procedures, nor put large numbers of seized homes on auction, and have even held back on shedding staff who worked in now depressed mortgage activities.
The implosion of a property bubble fuelled by cheap credit, which drove up the prices of property during the decade of the ‘Tiger’ boom, has left a legacy of bad loans on the books of the country’s financial institutions.
It has led also led to banks showing a reluctance to lend money.
The mega guarantee plan is seen as removing a big obstacle to the flow of credit to the economy as a whole, and also staving off the risk of widespread mortgage defaults and the national trauma that would follow.
Lawmakers hope that details of the key issue of the discount – the so-called ‘haircut’ – will be outlined by Finance Minister Brian Lenihan when the Dail (parliament) reconvenes on Sept 16.
Publishing a 136-page draft law for NAMA last month, Mr Lenihan denied that it was effectively a bailout for struggling developers and builders.
‘Anyone who owes money before NAMA continues to owe it and is expected to repay the full amount of the debt,’ he said.
He also said that the method of valuation ‘will recognise that the current market for property- backed loans and the underlying assets are very illiquid and will not require the banks to accept ‘fire-sale’ values’.
NAMA would also not be guided ‘by the property prices and expectations regarding property prices that underpinned the original lending decision.
‘It will aim to set a reasonable price having regard to a longer-term perspective on the property market,’ he stressed.
The Irish Times newspaper put the issue in the starkest terms.
Deciding the writedown, it said, will ‘represent a juggling act between the need to price the loans realistically and not force the banks to accept losses on a scale which lead to their collapse’.
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