Ireland has begun shifting banks’ toxic loans off balance sheets and into its “bad bank”, or National Asset Management Agency (NAMA). The aim is to cleanse its banking system of bad debts and kick-start lending. NAMA is set to buy e16bn worth of loans from the banks at a 47% discount to the loans’ face value to reflect their poor quality. It will try to sell the loans on at a later date in order to retrieve money for the taxpayer.
Given the steep cut, banks will need about €32bn of capital, most of which the state will provide. That will leave the Irish banking sector “effectively nationalised”, said Brian Lucey of Trinity College. NUMA will absorb distressed loans with a nominal value of e81bn, a sum equivalent to half of Ireland’s GDP.
What the commentators said
This scheme is “largely admirable”, said the FT. It legally obliges banks to get rid of troubled assets. The risk with voluntary schemes is that banks will continue to hide rather than face up to losses. But it doesn’t provide certainty about bank balance sheets, which is “the whole point of a bad bank”. If NAMA ultimately makes a loss, banks will have to pay a levy. So this package won’t draw a line under bank losses.
There is also uncertainty about future bank losses, so banks will remain loath to lend, said Capital Economics. Unemployment continues to rise, deflation has set in, and the housing market is still overvalued. “Some existing good loans will eventually turn bad.” Meanwhile, deleveraging firms and consumers are not in a borrowing mood. The plan will help get the banking sector “back on its feet”, but don’t expect lending to expand significantly any time soon. Indeed, throw in the ongoing fiscal squeeze, and the economy looks likely to keep shrinking this year and next.