Ireland to launch €81bn bad loan bank

Ireland will on Tuesday begin operating a new “bad bank” to house €81bn in bad property loans left over from the financial crisis and set out new capital requirements that are expected to see the further nationalisation of its banking sector.

Irish bank shares fell sharply on Monday amid fears that the new financial requirements could prove crippling.

The National Asset Management Agency, the government’s so-called bad bank, is set to reveal larger-than-expected “haircuts”, or discounts, on €17bn of loans extended to Ireland’s top 10 biggest property developers – the first tranche of loans to be taken off the banks’ books. The announcement will have direct implications for the level of capital the banks will need in the future – and will in turn determine the extent of any increased government shareholding the banks may need to maintain regulatory capital levels.

Shares in Allied Irish Banks, Ireland’s second-largest bank, lost almost 20 per cent amid investor fears that Dublin could end up owning as much as 70 per cent of it, after losses are crystallised on loans transferred to the government’s bad bank. Also hit hard were shares in Bank of Ireland, the country’s largest bank. Its shares closed down 10.4 per cent as investors speculated that Dublin could take up to a 40 per cent stake.

The bad bank’s role is to purge the banking sector of €81bn worth of loans – or about a fifth of total loans – extended during the boom years to Ireland’s leading property tycoons, who are now facing ruin.

Brian Lenihan, the finance minister, and Matthew Elderfield, the financial regulator, will set capital adequacy rules for the banks once the state has taken over their most impaired property loans. Banks are expected to have to increase their tier one equity – the strongest type of capital buffer – to about 7 per cent, far higher than current levels.

In total it is estimated that the banks will need €16bn in fresh capital. If much of this is provided by the government this could have implications for Ireland’s sovereign risk profile.

The plan is the centrepiece of Ireland’s rescue of its shattered economy, and follows the revealing in December of severe public sector pay cuts, which helped restore investor confidence in Brian Cowen’s Fianna Fáil-led coalition government.

Like Greece, Portugal and Spain, Ireland is facing a sovereign debt crisis, triggered by investor concerns over the hole in its public finances. At 11.7 per cent of gross domestic product in 2009, the budget deficit is the second largest in the eurozone after Greece.

However, Ireland has already taken decisive action with a fiscal tightening since late 2008 of 6 per cent of GDP.

http://www.ft.com/cms/s/0/880ec946-3b6a-11df-b622-00144feabdc0.html

 

Why all these complex machinations to get bad loans off banks' books? Just auction off the damn buildings and get them back out there in the marketplace.

 

You don't get it. That's what all the "complex machinations" are purposely designed to AVOID. This inflate at all costs motto is designed to avoid the realities of true value in the marketplace. Don't get me wrong, I despise this crap just as much as anyone, but I think it's pretty clear why they do this.

It's not all that different from the decision to release a handful of bank failures every "FDIC Friday" as opposed to liquidating them en masse. They want to control every aspect of the process.

 

Nothing has true value anymore, all housing in the US is still 25-50% overvalued.

How can there be true value with this kind of intervention involved.