Frank Fahey (Galway West, Fianna Fail)

Fianna Fáil in government has made a series of critical decisions over the past year to tackle the largest challenge faced since the foundation of the State. To date the Government bank guarantee, the €7 billion recapitalisation of Allied Irish Banks and Bank of Ireland and the nationalisation of Anglo Irish Bank, have all been vital in stabilising the banking sector.

The Government's approach to the banking crisis is along the lines adopted in Sweden in the early 1990s when its government introduced a State guarantee without which its banking system would have collapsed with dire consequences for the Swedish economy. It did not involve blanket nationalisation of the banks despite claims to the contrary. Only one private bank, Gota, was fully nationalised which happened only after it had collapsed. The Swedish Government also took full control of the already largely State-owned, some 77%, Nordbanken. All the banks remained in private hands. Sweden then transferred the impaired loans to bad banks to clear the banks' balance sheets. This prevented a fire sale of properties and delivered an orderly resolution to the crisis.

The establishment of NAMA is the critical development that will create a functioning banking system and return the banks to liquidity, as happened in Sweden. NAMA will have significant success. The banks will be lending to the real economy by Christmas and will begin to make a profit for the taxpayer. The value to be paid has been defined under the EU framework as the long-term economic value. That means that NAMA cannot pay more than it expects to realise from the loans over its lifetime. There has been much misunderstanding and misrepresentation of the application of the long-term economic value to the present market valuation of property.

In a normally functioning property market, price corresponds to the long-term value of property. In the past six years speculative forces here drove market prices through the roof and as a result they did not correspond to the long-term economic value. This ignorance of the long-term economic value caused by speculative gain in property prices caused the problems in our property sector. If people had been paying what corresponded to long-term economic value the bubble would have been avoided. On the same principle, current property prices do not correspond to long-term economic value. In the same way as upward forces distorted market prices between 2003-07, market prices are distorted now and will continue on a downward spiral and, consequently, there is a need for an adjustment to reflect the inevitable recovery in the market. That is the long-term economic value.

There is a well-informed article in today's edition of The Irish Times entitled, "Nama will do the business" by Bill Nowlan, a chartered surveyor. He writes that he had been concerned that the economic value premium over the current market values would be set at a much higher level but adds that as an asset manager, with more than 40 years experience, he believes "15 per cent over 10 years is an achievable target, particularly with ultra-low funding." This is one of the best articles I have read on NAMA. It is well-informed and written by somebody who has worked for a lifetime in the business. It is worthwhile reading for anyone who wants a good understanding of how NAMA will work.

The bonds the banks receive from NAMA in payment for the loans they purchase can be exchanged for cash at the ECB at 1.5%. NAMA transforms illiquid assets, loans for property, on the balance sheets of banks into liquid assets, bonds, which will result in an injection of tens of billions of euro in cash from the ECB into the banking system and the economy. It is a stimulus package, similar to the quantitative easing packages used in the United States and Britain that we cannot use because our currency is the euro.

Deputy Lee stated in a debate with me some weeks ago on Morning Ireland that the taxpayer would fund NAMA. That is nonsense. NAMA will be self-financing as it will have its own income stream through the collection of interest due from the good loan assets transferred to it. Proceeds from the eventual sale of the underlying assets will also accrue to NAMA and be used to pay off the bonds. NAMA's projections for property prices over the next decade or so will be prudent and realistic. To counter the misinformation put about by the Opposition parties it is important to note that there will be a forensic valuation of every loan that NAMA takes over. If losses do occur the taxpayer will be protected by one or more risk-sharing mechanisms.

As the Minister for Finance, Deputy Brian Lenihan, told the Oireachtas Joint Committee on Finance and the Public Service on 31 August, NAMA will not pay anything other than the current market value for certain assets, where this is the appropriate approach. John Mulcahy, the valuer who has been seconded to NAMA, confirmed this when he said that NAMA will pay for development land in many areas at its agricultural value.

It is also alleged that NAMA is a bail-out or rescue for builders or developers. This is simply not true. Developers who currently owe money to the banks will continue to owe that money to NAMA. Furthermore, as the Minister for Finance has confirmed, developers who are insolvent will be liquidated and NAMA will have the full range of remedies already available to the banking system, including repossession, enforcement of mortgages, the appointment of a receiver and the liquidation of companies.

If NAMA cannot recover the loans, the banks, not the taxpayer, will be penalised. We will see several liquidations of major property companies before Christmas. That is the first thing NAMA will be required to do in taking over loans where the losses have already accrued and the companies or individuals involved are insolvent. It is significant that 30% of the loans transferring to NAMA have been made on properties in the US, the UK and Europe. The US is already showing signs of recovery and the trend is for recovery to follow in Ireland and the UK. We can expect to see a significant improvement in the NAMA loan book over the short to medium term as a result of the international diversity of the properties involved.

Fine Gael, and Deputy Lee in particular, have been advocating letting the banks struggle on for another year before setting up a national asset management agency in September 2010. Does the Deputy not understand that businesses and families around the country cannot wait for another year, that we desperately need to get credit flowing now? Fine Gael's new "magic" wholesale bank would supposedly receive €2 billion in capital from the taxpayer and could borrow €40 billion from the ECB. This is nonsense because the ECB demands collateral. The magic bank would have to raise deposits, and these would almost certainly comprise funds withdrawn from the current banks. Alternatively, the State would have to provide the magic bank with €50 billion to €60 billion in bonds. There would be no benefit to the economy, since the banks have access to the ECB.

A central part of the Fine Gael plan is to set up legacy banks as a way to default on senior bond holders of Irish banks. The bulk of these senior bonds are held by pension funds, insurance companies and credit unions and are covered by the bank guarantee. Defaulting on senior bonds would dry up funding for Irish banks and for the State. Many of those who hold high-risk bonds, subordinated debt, have already incurred large losses. All three banks have already bought back up to €4 billion worth of subordinated debt at a significant loss to the debt holders. International experience shows that the failure of a bank would leave businesses and individuals at the loss of their savings, undermine confidence in the banking system in general and cause serious damage to a whole economy, requiring even greater State intervention to fix.

I had a high regard for Deputy Lee when he was an economic commentator on RTE. What a disappointment he has proved to be since becoming a Member of this House. The Fine Gael proposal has blown up in his face and the Irish public has seen through it. It is quite easy to understand that no credit bureau would lend to one who had previously defaulted on a loan. If one defaults on a car loan, one's credit history is damaged. Similarly, if one defaults to international lenders in one bank, those lenders are not likely to lend to one at another bank.

Fine Gael has further shown its ignorance of the issue at hand by comparing its proposal with the French financing corporation, the SFEF. It does not seem to realise that a similar entity here would be completely redundant. The Société de Financement de l'Economie Française, SFEF, is 66% owned by the French banks. It requires that the banks provide collateral against the loans it makes. A SFEF-type entity here would not make any loans because the Irish banks have already used their collateral to borrow from the European Central Bank. In addition, French banks can issue their own bonds but because France does not have a State guarantee scheme those bonds are not Government guaranteed. The SFEF is therefore a mechanism to provide a State guarantee to the funding of banks. There are other differences between the French financing corporation and Fine Gael's wholesale bank. Fine Gael's bank supposedly would attain funds from the ECB while the SFEF raises funds from wholesale markets, not the ECB.

In what was a very disappointing speech the other day, Deputy Enda Kenny mentioned the proposal made by Dermot Desmond in The Irish Times as being similar to Fine Gael's magic bank. Nothing could be further from the truth. Dermot Desmond's proposal was simply an insurance scheme designed to help bank shareholders. Although I do not disagree with much of what Dermot Desmond has to say, his proposal for an insurance scheme would not work in this country. It was examined and found not to be successful because it would leave the banks with the same problem they now have, whereas NAMA tackles the problem upfront and deals with the issue of liquidity. Unfortunately, Dermot Desmond's proposal would not.

The Labour Party's negativity in the debate has been the most misguided of all. Deputy Eamon Gilmore may have left the Workers Party behind but he took some of its policies with him to the Labour Party. Nationalising the banks in a pre-emptive strike, ending bank guarantees - one of the worst decisions taken by a political party in this country since I came to this House - and giving the "two fingers" to pensioners who have lost everything in the crash are more like the work of Deputy Gilmore's radical days when he was the president of UCG Students' Union than the stuff of an aspiring statesman.

In a debate last autumn I brought to the House's attention the international headlines that were fuelled by the irresponsible comments of Fine Gael and the Labour Party. Those headlines have cost us dearly. The cost of borrowing for Ireland has rocketed. Anyone who has looked at Indecon's recent report on the Lisbon treaty-----

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