State to buy up to €90bn of bad debts

FINANCE Minister Brian Lenihan said the Government will buy up to €90 billion worth of bad bank debts in a further effort to restore them to solvency.

As a result, Ireland becomes the first European country to allow the banks to rid themselves of the bad debts they built up in recent years through reckless lending to property developers.

Other countries have looked at the idea, but the difficulty in valuing the extent of the bad debts has prevented such a move.

Other economies like Britain have tended to go for insurance cover on such loans, a move that was the preferred option for the Irish banks when the difficulties faced by them was being discussed with Mr Lenihan.

The Irish state has already pledged up to e7bn to the country’s two major banks to help restore their solvency ratios.

The potential toxic loans on the banks of the books of the six Irish owned banks will be transferred to a new National Asset Management Agency, which will be managed by the National Treasury Management Agency.

The minister said in the emergency budget presented to the Dáil yesterday afternoon that government bonds would be issued to cover the transfer.

He made it clear, however, that taxpayers will not be exposed to any major losses as a result of the new toxic bank being set up.

In his statement, he said the state would pay significantly less for the debt it was taking on board.

“The potential maximum book value of loans that will be transferred to the agency is estimated to be in the region of e80bn to e90bn, although the amount paid by the agency will be significantly less than this to reflect the loss in value of the properties,” he said.

“If the agency were to fall short of recouping all of the costs, the Government intends that a levy should be applied to recoup any shortfall from the banks.”

The banks have been major casualties of the collapse in the Irish and British property markets.

The collapse has hit the economy hard because the construction sector in Ireland was about 25% of the total economy, double that in other developed economies.

Leading Irish stockbrokers last week estimated the amount of toxic debts in the banks that would materialise stood at e25bn.

They said if the figure was higher than that, the Government could be faced with pumping another e10bn into the banks to restore solvency.