BILLIONS OF euro in bank losses must be incurred by international investors who helped to fund hundreds of risky property loans, Fine Gael has said.
Bondholders have nearly €30 billion worth of subordinated and unsecured debt that was not covered by the Government’s bank guarantee scheme, the party said.
Fine Gael deputy leader Richard Bruton warned strongly against the National Asset Management Agency (Nama) buying toxic debt but equally, he opposed Labour’s nationalisation demand.
“The Government has rushed headlong into Nama whereby the taxpayers will shoulder the responsibility for working out the losses. This is an undertaking of Napoleonic proportions,” he said.
The Government should instead keep some options open, and set up a new bank “within six weeks” backed by a €2 billion State investment, but with access to €40 billion worth of European Central Bank funds, to feed necessary lending to businesses, he said.
Ordinary bank shareholders have lost nearly everything, he continued, but Nama would mean bondholders “who made good profits in the good years but who will walk away scot-free under this proposal”.
Nama would not work, he said, because the public would not trust that fair prices were paid for failed property loans, while it would also take years longer to deal with them after they had been bought.
The Government will have to raise €70 – €90 billion of debt to pay for Nama costs and this will cost €3 billion a year in interest payments. A similar body in France to sort out the Credit Lyonnais bank collapse cost €18 billion before it finished.
However, he said the nationalisation plan pushed by Labour leader Eamon Gilmore was equally flawed, even though Mr Bruton said it was less risky than the Government’s plan. Nationalisation “makes it almost certain” that the taxpayer will have to honour every one of the Irish banks’ debts, including bonds.
“There is a moral hazard in capitalism. They can’t expect to be bailed out. That is not healthy, nor can we get into this notion that a bank is too big to fail,” he said.
However, he acknowledged that Nama may become a reality that cannot be changed if legislation is passed, and it begins work before a general election is held.
“Governments are legally liable for the decisions made by past governments. It would be too late to change anything then,” he said.
The Government should make it clear to banks that the guarantee will end on time in September 2010, and that they must have their finances in order by then.
If they failed stress testing then, they should be put into administration and split into “good banks” and “bad banks”. The “good banks” would take over and guarantee all deposits; the banks’ branch network and easily-valued assets.
He acknowledged the State would have to find billions to invest in banks, posing an example that “new AIB” might need €20 billion. The “good banks” would be sold off once they can be done so at a profit. The “bad banks” would lose their licences to issue new loans and would “work down” property loans over years. Debts would be repaid, with the State getting its money back first.
“If [they] prove to be insolvent, they will be unable to service their obligations. At this point, normal bankruptcy proceedings would apply. This may involve significant haircuts for unsecured creditors, and [others],” he said.
