Levy threat defeats purpose of creating bad bank, claims FT

REACTION to the bad bank announced by Finance Minister Brian Lenihan on Wednesday evening has been mixed.

In its editorial columns yesterday, the Financial Times warned there was no point in having a bad bank that absorbed none of the risks of the assets being acquired.

The article said the imposition of a levy totally undermined what the State was trying to achieve, because it left the banks’ balance sheets exposed to the bad debts on transferred loans.

The minister said the State would impose a levy on the banks if it was at a loss at the end of the process, which defeated the aim of ridding banks of their bad property loans, said the FT. If the purpose of the bad bank was to provide certainty about the balance sheets of the banks, the threat of a levy defeated the whole purpose, it said.

Meanwhile, an Irish quantity surveyor who did not want to be named pointed to the huge difficulty of trying to agree valuations.

In the wake of the property boom in Berlin in the early 1990s, property prices plunged following the fall of the Berlin Wall. One building that sold for e180m at the height of the boom saw its value fall to e11m after the bubble burst and its value has moved little in the meantime.

Berlin’s domestic properties have also suffered hugely and the valuations have not recovered either, he said.

If Berlin is a barometer of what will happen here, then it could take between 10 and 15 years before property values here start to pick up in any real way, he warned.

In that sense trying to agree valuations with the banks is an exercise that will be “fraught with pitfalls”.

In its analysis, Goodbody Stockbrokers, a subsidiary of AIB Group, which is due for a e3.5bn bailout by the State, said the main uncertainty remains over the amount to be written off the current value of the assets being transferred: the write-down of assets could be as much as 15%.

It adds to “uncertainty” over the economic outlook and makes it difficult to pinpoint with any accuracy the valuations of the e90bn of bad loans due for transfer to the new bank.

But Goodbody believes the levy, derided by the FT, means exact valuations on the dodgy assets do not have to be fully determined.

It concludes the asset deterioration is likely to require cash injections of a few additional billion into the two banks on top of the e7bn already pledged.

That implies the State will end up with majority stakes in both banks.