Michael Ahern (Cork East, Fianna Fail)

In the 1970s I worked as a financial controller in a large building firm in Cork. At that time the country was in the throes of an economic crisis not much different, and possibly worse, than that being experienced today. I know first hand the problems facing small, medium and large firms. At that time the unemployment rate was greater, emigration was rife, inflation was high and interest rates were at their peak.

There is one difference between now and then; at that stage there was agreement across the board that we had to work together to get the country out of its problems. The types of innuendo, half-truths, rumours and allegations being floated around these days by the usual suspects outside the political field and by some senior members of the Opposition, who know better, were absent.

The Opposition has a duty to ask the hard questions but it is clear it is not interested in the answers. It is doing a great disservice to the nation in this approach. The continual emphasis in its approach to NAMA that the agency is out to save the bankers and developers is cynical and untrue. People in glasshouses should not throw stones. The implication is that bankers, including the CEOs and chairmen, are friends of Fianna Fáil but one only has to look at the party affiliations of some senior board members of the main banks to see that such an argument does not hold water.

To suggest that all builders and developers are Fianna Fáil supporters is to ignore the facts. It is time to stop this nonsense and focus on the real issues facing the economy. As an accountant for many years I have had dealings with financial institutions on behalf of clients and I understand the need to acquire cash and credit to run businesses. The Government recognises that what is now required in this economy is a healthy and working banking system.

The course of action being taken by the Government in establishing NAMA is based on advice it has received domestically, the advice of institutions such as the IMF and also the example of other countries taking similar steps. There is much praise from Europe for the action being taken. Jean-Claude Juncker, the Prime Minister and Finance Minister for Luxembourg stated that he thought "the Irish Government, with great courage and a deep sense of responsibility, is on the way to taking the right step in a very difficult situation". Jean-Claude Trichet, the ECB President, stated "In these circumstances, what impressed me the most in Ireland was the level of national unity I perceived". He also stated that NAMA was very well oriented.

The ESRI has backed the measure and Mr. John Fitzgerald has said that the Government had got it right with the supplementary budget and the country was on the right track. Mr. Peter Sutherland said "What we are not recognising is that we have great strengths and the position is not quite as bad as is being painted. Standard & Poor's has backed NAMA, indicating that it thinks "the plan could achieve the Government's stated objectives of putting the banks on a stronger footing, restoring investor confidence in them and improving both their liquidity and their capacity to lend to credit-worthy Irish borrowers". Maarit Lindstrom, chief economist of the Finnish Chamber of Commerce, stated that the creation of a bad bank to relieve lenders of toxic assets had proved to be a positive experience in Finland in the 1990s, and the Irish Government needs to intervene to relieve the banking sector of bad assets in order to create trust and so forth.

We need to know that when we put money into a bank it will remain secure. We need an efficient system of payments in the economy and if we allow banks to fail, it will leave businesses and individuals at a loss of their savings, undermine confidence in the banking system in general and cause serious damage to the economy, which would require even greater State intervention to fix.

The problem with Ireland's banks that hinders them in functioning properly is a lack of adequate capital, which would give them a buffer to absorb losses if and when they occur while keeping depositors' funds. Adequate cash resources are needed to allow banks to repay depositors and lenders and make new loans available. A lack of long-term profitability will be an obstacle to building up capital to allow banks to offer greater lending and buffers against losses.

For the Irish banks, capital and liquidity have been much more difficult to access at the very time they are needed most. In order to protect savers and the economy, the Government introduced the deposit guarantee scheme, injected capital into the banking system and nationalised Anglo Irish Bank. The Government interventions to date have been bold and aggressive, and together with the support of the European Central Bank they have succeeded in protecting the banking system. However, the problems arising from the banks' exposure to risky loans, especially with regard to property, cannot be allowed to continue as the banks cannot return to normal banking unless the problem is addressed.

NAMA will tackle the problems of the banking system by stripping their most difficult classes of property loans as well as performing loans. The banks will take losses on many of those loans now rather than over time, leaving them cleaned up and better able to get on with normal banking business. The banks will be in a better position to raise funds for lending in the economy to small and medium businesses as well as the public.

The transfer of bonds from the State to the banks in payment for the loans transferred will give the banks greater access to cash through world markets and the European Central Bank. It is important to emphasise - in response to so much mischievous misinformation - that borrowers will owe NAMA the same amount as they owed to the banks concerned. Borrowers will be expected to pay the full amount owed by them in exactly the same way as they are obliged to pay their bank at present. With borrowers who will not or cannot repay their loans, NAMA will pursue them to ensure maximum return. Borrowers in most cases have lost substantial sums with the large fall in property prices, and where loans are not being repaid, borrowers face further losses as NAMA takes control of the underlying assets and collateral.

Many people are concerned that the assets, loans and property held by NAMA will not perform well enough to recoup its costs, including payments to banks.

The Minister for Finance, Deputy Brian Lenihan, stated:

The estimate is that 40% of these loans are cash-flow producing. The cash flow produced will be sufficient to cover interest payments on the NAMA bonds and operating costs.

In respect of the assertion that taxpayers will lose out, the Minister emphatically stated that the Bill provides for part of the consideration for the assets transferred to be in the form of subordinated bonds. If NAMA were to lose money, this would put the banks at risk without giving them an upside in respect of its gains. The Minister also stated, "If, on the winding up of NAMA, there is a deficit, the Government may impose a levy".

As is acknowledged by people on all sides in the House and those further afield, the banking system has let us down. I welcome the announcement by the Minister to the effect that existing structures cannot remain as they are at present. There have already been changes at chairman and CEO level in the financial institutions. There will be further changes at board level in the near future. The Minister said that any institution participating in NAMA will be required to restructure its operations and that he will insist that this will be a real process leading to a reformed and reinvigorated banking system.

In July, Mr. Bo Lundgren, the director of Sweden's National Debt Office, who was Minister for Fiscal and Financial Affairs during the Swedish bank sector collapse, which lasted from mid-1991 to 1996, met the Joint Committee on Finance and the Public Service. Mr. Lundgren has been quoted on numerous occasions as favouring nationalisation of the banks. A number, but not all, of the banks in Sweden were nationalised during the period to which I refer. When asked how long Ireland might need to get back to a solid banking system, he said it was difficult to judge and the timeframe would differ from country to country. However, he said that as Ireland's property market had probably bottomed out, the banking system should be in order within a year or two. He said that Ireland is roughly now where Sweden was in 1993. By that stage, Sweden was nearing the end of its financial crisis.

Mr. Lundgren further stated that the main challenges to meet to minimise a credit crunch emerging from a banking crisis are the maintenance of liquidity and the restoration of confidence both in investors and bank management. He added that restoring a capital base to what is needed at the time, even though it might not be to original levels, is vital. He said that a lack of credit flow is the main reason for any government to be involved.

Sweden's banking sector collapse – which lasted from 1991 to the middle of 1996 – although smaller than what Ireland has been experiencing, resulted in a mix of mergers between banks, nationalisations, liquidations and the establishment of two bad banks. The end result, however, was that most of the value of lost loans was recovered. In that context, Mr. Lundgren said that bad banks – such as the proposed National Asset Management Agency – should not be closed as soon as the sector recovers but should be kept in place for a few years to attempt to recover as many bad assets as possible.

Fine Gael wants this country to follow the example of the Lehman Brothers default-on-your-debt model and also wants to establish a new "magic" bank. Its plan does not even have the support of some of its former leaders. Deputy Kenny's new magic wholesale bank will supposedly obtain €2 billion in capital from the State and will be able to borrow €40 billion from the ECB. This is nonsense, particularly as the latter demands that collateral be provided. The magic bank would be obliged to raise deposits and these would almost certainly come in the form of funds withdrawn from the existing banks. Alternatively, the State would have to provide the magic bank with €50 million to €60 billion in bonds. There would be no benefit to the economy from this, particularly given that the banks already have access to the ECB.

Fine Gael also wants to establish legacy banks to force losses on holders of bonds. The bulk of bonds issued by Irish banks are ordinary senior bonds such as, for example, certificates of deposits. Senior bonds are: part of the banks' funding, not part of their risk capital; owned by pension funds, insurance companies and other long-term providers of debt, that is, the same investors who purchase Government debt; covered by the bank guarantee; and legally entitled to the same treatment as deposits. Defaulting on senior bonds would lead to funding for the banks and the State drying up.

Holders of subordinated debt - which forms part of the banks' risk capital - have suffered large losses as a result of debt buy-backs at deep discounts. The international experience is that the consequences of the failure of a bank would be to leave businesses and individuals at the loss of their savings, undermine confidence in the banking system in general and cause serious damage to an entire economy, which, if it were to be repaired, would require even greater state intervention.

The Labour Party's proposal copies the Government's plan in that it suggests the establishment of an asset management agency similar to NAMA but with a different name. Labour wants to impose a 50% discount on the loans being transferred to NAMA. It has chosen this number because a discount of this magnitude would wipe out the capital base of the entire banking system and the State would then be obliged to recapitalise the banks in full. This would achieve Labour's ideologically-driven goal of a fully State-owned banking system.

Labour's approach is in violation of EU Commission rules. The Commission insists that valuations must be determined following a due diligence examination of each loan. Under NAMA, loans will be valued individually. The EU Commission does not allow a flat discount across all loans as proposed by the Labour Party.

NAMA has the support of the IMF, the OECD and the ECB. The backing of the latter is crucial because it has agreed to exchange the NAMA bonds issued to the banks for cash. The ECB would not back Labour's proposal as it is in violation of EU Commission rules. The ECB also indicated that it is opposed to full nationalisation.

The Government has ruled out the full nationalisation of AIB and the Bank of Ireland on the basis from due diligence exercises undertaken in March and other information on expected future bank losses which indicates that full nationalisation is not necessary. Once an institution is completely nationalised, the State must sustain it. Anglo Irish Bank is a case in point. The State is obliged to ensure that the minimum capital is maintained in such an institution. If that is not done, the institution ceases to be a bank and all its liabilities become an immediate charge on the State and the taxpayer.

If AIB and Bank of Ireland were fully nationalised, shareholders would have to be compensated with cash from the State. At current share prices, this could mean a €5 billion cash payout. From where does Labour propose that the State should obtain this money? Such money would have to be found before a single cent of new capital were injected. New injections of State capital would have to be borrowed on world markets at interest rates of at least 5%. NAMA bonds pay a much lower interest rate.

Full nationalisation of AIB and the Bank of Ireland would impact negatively on the ability of the banks to attract funding and the cost of sovereign funding. Anglo Irish Bank lost €15 billion in deposits following its nationalisation in January and the Central Bank and Financial Services Authority of Ireland has been obliged to make up the majority of the difference through a special liquidity facility of €10 billion. This is because providers of funds - insurance companies, pension funds, and so on - have credit limits for each borrower to avoid excess exposure to one customer. Since Irish banks, if nationalised, would be regarded as part of the State, the individual credit limits for all of them and the State would be merged.

Full nationalisation would inevitably result in Ireland's sovereign credit rating being downgraded and the State would be obliged to pay higher interest rates on its borrowings. Moody's rating agency warned in recent days that the Government would have to deliver on NAMA or the country could face further cuts in its credit rating.

Under Labour's plan, banks would be delisted from the stock market. How does Labour propose that the State should sell off its stakes in the banks over time? When should these stakes be sold off? How would fully nationalised banks perform in the interim? Political interference in lending policy has a disastrous history worldwide.

Full nationalisation is the nuclear option and the only country that has fully nationalised its banks in the present crisis is Iceland. Did Iceland get it right and every other country in the world get it wrong? The NAMA proposal makes the Government responsible for providing funds to meet the banks' capital requirements. Nationalisation would require the Government to meet both the banks' capital requirements and their funding requirements. The Labour Party cannot cost its proposal and once the State was to assume complete responsibility for the financial sector, the cost could be endless. It is a high-risk strategy that inevitably would end up costing taxpayers even more and would undermine confidence in the banking system and the country as a whole.

In conclusion, I believe that what is needed is to get credit flowing for ordinary businesses and families, to create and protect jobs and businesses and to safeguard business systems rather than individuals. Moreover, the legislation for another regulatory system must be brought forward as soon as possible. I believe NAMA is the way forward and I commend the Bill to the House.

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