December 1, 2009 / 7:56 PM / in 9 years

Ireland to manage "bad bank" debt burden

DUBLIN (Reuters) - Ireland faces a heavy but manageable debt burden in coming years after it pays 54 billion euros (49 billion pounds) to cleanse banks’ balance sheets via a “bad bank,” Irish central bank Governor Patrick Honohan said on Tuesday.

Ireland last month completed legislation to set up the National Asset Management Agency (NAMA), a bad bank that will give lenders including Allied Irish Banks ALBK.I and Bank of Ireland BKIR.I bonds in exchange for their risky commercial property loans.

“The State will now be servicing a heavy, though manageable, burden of debt in the years to come,” Honohan, who is also a Governing Council member of the European Central Bank, said according to the text of a speech at a business dinner.

“The banks have become largely dependent on the government for capital — and on the European Central Bank for liquidity — since their losses threatened to overwhelm the risk resources provided by the shareholders,” Honohan added.

Fitch Ratings last month cited NAMA as one of the reasons for cutting Ireland’s sovereign credit rating by two notches to “AA-“ from “AA+,” saying that the scheme would push gross government debt to 110 percent of gross domestic product next year from just 25 percent in 2007.

NAMA will conduct much of its business via a “special purpose vehicle,” allowing Ireland to treat its debt outside the government’s balance sheet for European Union accounting purposes.

“Although it may not be strictly accurate to say that the banks have no money, it needs to be borne in mind that any additional losses or costs now incurred by the banks are likely to pass straight through to the government,” Honohan added.

Even without the cost of the bank rescue, the government has warned it faced a “ruinous” spiral of debt and the possibility of an eventual IMF rescue unless it managed to cut day-to-day spending in next week’s budget for 2010.

“CHARGE-BACK” FOR REGULATION

Ireland’s banking system has been hit by the bursting of a decade-long property bubble and by deposit and loan scandals surrounding now nationalised Anglo Irish Bank.

Honohan, who took over as governor in September and is overseeing the overhaul of the regulatory system, said he expected assertive supervision and a renewed emphasis on enforcement “even at the risk of the regulator incurring legal costs in unsuccessful actions.”

However, because of pressures on Ireland’s public finances, he said Ireland would not be able to continue paying for much of the cost of financial regulation which would have to be shared by participants in the future.

“Moving to a 100 per cent charge-back arrangement for at least some of these activities seems inevitable to me,” he said.

Reporting by Andras Gergely; Editing by Ron Askew and James Dalgleish

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