THE EUROPEAN Central Bank (ECB) has urged the Government to exercise caution on how much banks should be paid for toxic property development loans being purchased by the National Asset Management Agency (Nama).
The ECB’s view on Nama reignited the dispute between the Government and Opposition parties over the size of the discount that the agency should apply when buying bank loans which have a current value of close to €90 billion on the lenders’ books.
While broadly supportive of Nama, the ECB says its preferred model of using a “long-term economic value of assets, rather than current market values, requires careful consideration”.
The Frankfurt-based bank warned that the long-term economic value, which the Government will use to determine the price it pays for certain loans, should “not involve undue premium payments” to the banks and should “avoid creating incentives” for the banks for using Nama.
The ECB said there should be “an adequate level of risk-sharing” to limit the cost to the taxpayer.
Fine Gael claimed the ECB had confirmed that Nama would overpay by billions of euro for toxic assets.
The party’s finance spokesman Richard Bruton said the ECB questioned two major planks of Nama – the “long-term economic value” concept and the proposition that taxpayers should take all the risk.
Labour’s finance spokeswoman Joan Burton said the ECB was very clear in its preference for market value as the basis for valuations.
“It also refers to nationalisation as the least preferred option,” she said. “But if the market value is to be adopted then the capital base of one of the big two Irish banks will be seriously diminished and the only option will be partial or total nationalisation.”
The ECB issued its opinion on Nama as John Mulcahy, the auctioneer advising Nama on how to value the loans, told an Oireachtas committee hearing on the “bad bank” plan that property values had fallen 50 per cent from their peak and the property market had reached the bottom of the cycle.
Speaking at the Oireachtas Joint Committee on Finance and the Public Service, Mr Mulcahy said the long-term economic value of loans would be set looking back at property market cycles – which had averaged seven years in duration – since 1971.
He said that an analysis of historical property cycles since then had showed that commercial property values rose on average by 88 per cent from the bottom of the market, while residential property values increased by 96 per cent.
Mr Mulcahy agreed with Fine Gael TD George Lee that the current property crash was unprecedented.
Mr Lenihan said there was no question of the Government paying anything close to 80-90 per cent above the current market value when Nama evaluates the price to be paid for the loans.
The Minister all but ruled out the prospect of full nationalisation for either of the country’s two largest banks, Bank of Ireland or Allied Irish Banks, following Nama’s acquisition of bad loans.
He said that both were “survivable entities” and that it is unlikely that the value of their shares would be wiped out by the losses that arise from the Nama process.
While refusing to say how much the State would pay for the loans before September 16th, Mr Lenihan insisted the price would not “be based on any assumption of a return to the recent ‘bubble’ prices for property”. In several clashes with Mr Bruton and Ms Burton, Mr Lenihan criticised their parties’ respective plans for a good bank and for temporary nationalisation.
Mr Lenihan told the committee that Nama would take on 1,500 borrowers and 18,000 loans, and that “hopelessly insolvent developers” will be put into liquidation.
