Updated: Wednesday, 3rd March, 2010 4:40pm

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Time for Lenihan to tell taxpayers about banking clean-up bill

Eamon Quinn.

Brussels, and presumably the European Central Bank in Frankfurt, took a long look and finally last week approved the setting up of the National Asset Management Agency (Nama), the bad bank agency that, in the name of the taxpayer, will buy the good, bad and downright ugly commercial property loans from five of Ireland's banks.

Matthew Taylor at Fitch Ratings, one of the world's big three corporate and sovereign debt ratings agencies, put it best when he said the green light for Nama was a "positive step" to getting the banks back on a commercial footing but that it will come at "a high price for the country and the banks themselves".

In short, in the Nama land of very big numbers, the taxpayer is stuck at both ends of a particularly costly deal. Nama plans to pay around €54bn, accounting for about a third of annual gross national product or one and half times all the annual taxes the Government currently raises in a year, to buy about €77bn of loans the banks foolishly advanced to a small group of property speculators.

The banks - Anglo Irish, AIB, Bank of Ireland, Irish Nationwide and EBS - do not earn enough money from their normal banking operations to cover the smaller price that Nama will pay them for the loans and, therefore, in the next 18 months, will need to tap the taxpayer to plug the big holes in their accounts. Fitch expects AIB and Bank of Ireland to seek extra capital by raising it directly from the markets, or by selling assets and "from other possible measures".

Everyone knows that the all five lenders will need more big dollops of taxpayers' cash. "If either bank cannot raise the full amount it needs, then Fitch would expect it to turn to the Government," said Taylor, adding that Anglo, EBS and Irish Nationwide have nowhere else to turn "and will require capital from the Irish Government". It is clear that the upfront cost of Nama will be greater than the Government and its officials anticipated as recently as last summer. At the time, Nama sources were confidently predicting that the discount it would pay the five lenders for their commercial property loans would average 30 per cent. But, for whatever reason, maybe under demands from Europe, the amount of the discount appears to have grown and the five lenders will have to come up with more money that they do not have.

The Commission was never going to oppose Nama. The asset-buy out scheme featured, after all, on its own list of options it gave European governments to clean up banking messes. Brussels took longer than expected to approve Nama so it must be satisfied that the final bill for Irish taxpayers to bail out the banks has been costed.

Maybe even the EU needed more time to get its head around the full extent of the horrible losses on the books of the nationalised Anglo Irish. Estimates for Anglo's 'kitchen-sink' losses have been rising at an alarming rate. Remarkably, Minister for Finance Brian Lenihan, who oversees Nama, has yet to say how much it will cost taxpayers to clean up the banks. Opposition politicians have failed to press him and get answers on the big number.

Nama, as a government agency, will run its own affairs, mostly untouched by the oversight that government departments face. Nama will even be protected from low-level scrutiny afforded journalists and citizens because it is, like the Central Bank, exempt from Freedom of Information requests. Promised deadlines have come and gone. Last summer, Nama sources were predicting that about €40bn or all the biggest loans to the top 40 property developers would have been transferred into the State agency by February.

The rest of the €37bn, comprising less complicated loans because they needed little unravelling, ought to have been taken out of the banks and plopped into Nama by this summer. But a Government minister on national radio last weekend talked about the process being completed "by the end of the year", and many journalists believe it will likely extend into early 2011.

Meanwhile, Minister Lenihan is running out of reasons not to tell taxpayers how much it will cost taxpayers to clean up the banking mess. It is a point I have written about in Business Watch many times in the past. Last September, when officially launching the legislation to set up Nama, Mr Lenihan failed to mention the extra cash, or so-called recapitalisation, taxpayers will have to pay into the banks to make good their losses.

The IMF report published last summer remains the best guide to how much the discount will cost taxpayers. The Irish banks, said the IMF, would need between 12 per cent and 15 per cent of GDP, which translates into €21bn and €26bn in cash, to make good their losses. It is clear that mounting estimates for Anglo's losses has pushed the bill out toward the higher end - the €26bn - of the IMF forecast.

By last summer, the Government had already pumped €11bn into Anglo, AIB and Bank of Ireland, leaving, if the IMF forecasts are right, the five lenders needing an additional €15bn between them. Strip out the potential for AIB and Bank of Ireland to raise the odd billion euro here and there - selling overseas banks and loan books and buying back some classes of its bond debt - and the incremental bill the big two and the other three lenders will need from taxpayers comes to as much as €13bn.

The European Commission obviously knows the big bad figure. Now, it is time for Mr Lenihan to some clean and tell taxpayers how much extra cash it will cost them to clean up the banks.