'Difficulty' exists with Coalition's toxic asset plan - ESRI

THERE IS an “implicit difficulty” with the Government’s plan for dealing with toxic assets in banks, Economic and Social Research Institute (ESRI) economist Dr Alan Barrett said yesterday.

Questioned on his views as to whether the banks should be nationalised, he told reporters at an ESRI press briefing that he was inclined towards that course of action but was “open to be persuaded” otherwise.

He said that if the National Asset Management Agency (Nama), which is being established to buy loans with a book value of up to €90 billion, acquired the loans at a discount, then that would imply an ongoing need to provide capital to the banks.

“Would it not be better to go for nationalisation straight away, as that is an end point you might end up at anyway?”

He said the fact that a concrete plan for the banks was being put in place was welcome as it worked against uncertainty. However, he said the proposal that the banks would be subjected to a levy if the taxpayer ended up at a loss as a result of the Nama process, operated to create uncertainty.

The levy “seems to me to be a flaw in the Nama arrangement” and involved an “inherent contradiction”, he said.

Prof Barrett also asked how Nama was going to be able to price the assets it would buy from the institutions, given that the price was usually set by what something was worth in the market and at present there was little by way of a market for the assets.

“It makes no sense to me . . . the idea of price is the price someone will pay . . . It isn’t clear to me how you can value these things in these circumstances,” he said.

He said his “big fear” with the Nama was that it would not bring closure to the bank issue. While there were dangers with nationalisation that the banking system would become politicised, “if you nationalised the banks you would know what structure you were in,” he said. “To a great extent, these banks are only functioning because of the State guarantee.”

The purchase of the assets from the banks would have an immediate impact on the national debt and the size of the State’s interest payments bill. Until the price that was going to be paid for the assets was known, the size of the interest payments could not be known and so this factor was not included in the quarterly commentary figures published by the ESRI.

Dr Barrett said that if the State paid €40 billion for the assets, and paid 5 per cent interest on the borrowings, that would mean an immediate increase of €2 billion annually on the State’s interest bill.

In its commentary, the institute said a comprehensive assessment of the Nama project was not possible due to the lack of detail available, but that movement towards decisive action was a positive development.

The earlier the banking issue was resolved, the better this would be in terms of providing an environment for recovery.

It also said the desirability of a speedy and comprehensive resolution would suggest that nationalisation may be the preferred option.

“Nationalisation would also ease concerns over the correct pricing of assets. However, the route is not without complications, both legal and political.”