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Ireland’s ‘bad bank’
Is it a ‘dump for debts’ or a ‘licence for larceny’?
With some €77bn of impaired loans to manage, the Irish National Asset Management Agency is the centrepiece of a 10-year drive to rebuild the country’s banking sector. Not everyone, reports MAGGIE STANFIELD, thinks it’ll succeed.
It’s been called a “virtual skip for dumping Irish banking’s toxic debts”. It’s also been dubbed “a licence for larceny that’ll bankrupt us”. If ever there was a riddle wrapped in an enigma, the Irish National Asset Management Agency (NAMA) is surely it.
Set up under special legislation and approved by the European Union towards the end of February, Ireland’s “bad bank” is now responsible for managing some €77bn of impaired loans crippling the balance sheets of five institutions – Anglo Irish Bank, Bank of Ireland, Allied Irish Bank, Irish Nationwide and Educational Building Society.
These toxic debts have also seriously disabled this most celebrated of the so-called “Celtic tiger economies”. The debts arose entirely during the property and construction boom that, at its height, accounted for 20 per cent of GDP. Operating as an independent commercial entity under the aegis of the National Treasury Management Agency, NAMA’s aim is to maximise the value and recovery prospects of the assets in the interest of the State.
It’s not nationalisation, but the agency effectively puts control of the banks in government hands. Under the special legislation, Irish Finance Minister, Brian Lenihan TD, has given the agency three distinct purposes: • to address the serious threat to the economy and the stability of credit institutions in the State generally and the need for the maintenance and stabilisation of the financial system in the State; • to address the compelling need to facilitate the availability of credit in the economy of the State; • to resolve the problems created by the financial crisis in an expeditious and efficient manner and achieve a recovery in the economy.
EU Competition Commissioner, Joaquin Almunia, acknowledges that “Ireland’s financial sector has been one of the most affected by the global financial crisis in Europe – and the bursting of the Irish real estate bubble has only compounded the problems.”
It was a construction frenzy that brought Ireland to its economic knees. Analysts at University College Dublin estimate that 345,000 homes now lie empty, mainly because 170,000 too many were built in the first place. Commercial property is also vacant on a massive scale. Lead author of the report, Dr Brendan Williams, argues that the price builders pay for development land has further to fall. Residential property prices have already collapsed by around 50 per cent.
NAMA’s 10-year mission is central to the government-driven plan to rebuild credit flow, trust and confidence. “NAMA cannot fail. Trust has to be put back,” asserts Pat Farrell, Chief Executive of the Irish Banking Federation, the sector’s representative lobby group. “It’s a huge task, but it has to be achieved.
“We have to rebuild very slowly, but NAMA’s cleaning up of the bank balance sheets will help. So will assertive regulation, EU approval and IMF support. Banks will have to show themselves willing and able to keep a good flow of credit to businesses, SMEs and homeowners. Ireland has to get back on a growth path.”
Other observers aren’t slow to spread the blame. “It was our banks, our regulators and supervisors of our credit institutions and our government who were at fault. All are fully guilty in that order,” says banking and property market expert, Peter Mathews. “The collapse of Lehman Brothers and the financial collapses in other economies did not cause our credit pyramid and our subsequent credit market and capital assets market crashes. Absolutely not.”
Loans for land development were made by the banks on a disproportionate scale for a country of five million people. The transportation infrastructure was overhauled and a massive amount of commercial and residential development was carried out against a background of ever-increasing land and property prices. This inflated the spirit of economic optimism – and then the bubble burst. Just one example dramatises the plight: the value of a single plot of development land in Athlone plunged 98 per cent from €31m to just €600,000.
Not everyone is convinced that NAMA can succeed. Business commentator, David McWilliams, a former economist with the Irish Central Bank, describes NAMA as “a licence for larceny” and adds: “The land has reverted to the price you’d get from a farmer for putting a donkey out to graze on it. NAMA will bankrupt us.” Fine Gael’s leadership describes it as a “double or quits” initiative. All Ireland hopes its legendary luck holds out.
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