Published: Wednesday, 16th September, 2009 5:00pm

One more step for Nama; one giant leap of faith for taxpayers

This week, we will finally learn what the Government proposes to pay the banks to take the €90 billion of distressed loans into Nama and cleanse them from their balance sheets. This is the central question around which enormous debate has centred since the 'bad bank' solution was first mooted five months ago and one which Irish taxpayers will be anxiously waiting to hear.

During the course of the next year, the new agency will take control of a massive amount of property and commercial-related lending from Ireland's big five banks, a figure which amounts to roughly half of the annual output of this country's economy. It is a very scary prospect and the nagging fear is that taxpayers could be saddled with huge losses that will result in higher taxation for at least a generation if this project fails.

It is rarely described in such terms by the Government but that is the reality. Nama will be taking over the risk, on behalf of taxpayers, of the banks' lunatic and unregulated lending practices to property developers for the five years from about 2003.

This week represents a major step on the road for Nama as the decision is made on what discount the agency will pay the banks for the impaired assets. Pay too big a discount, and the banks will certainly be back with the begging bowl to fill the black holes in their balance sheets; too little, and the taxpayer will lose out and the banks' shareholders and investors will gain as the banks recover in the years ahead.

Once up and running, Nama will take over the first €20bn worth of loans by the year end, tha next chunk by about February 2010 and the final tranche should be taken over by next summer.

The optimistic view is that by buying these property assets at the bottom of the market, Nama could turn a profit for taxpayers when it eventually sells the properties in the years ahead. The downside is if property valuations do not recover to the extent predicted and Nama pays too much for them, we could all end up carrying a major debt burden for many years to come. The absolutely crucial thing is that taxpayers' interests are protected. The amount Nama will pay the banks for their loans will determine whether the agency does indeed fulfil that criterion. It is crucial, too, that the financial institutions themselves remain viable after the write-downs so that they can begin to function again and start releasing money to a credit-starved business sector. That is, in theory, how it is all supposed to work.

A proper and fully functioning banking system is an absolute prerequisite to saving Ireland's economy, however. Nama has been variously described as a massive gamble and a bailout for bankers and developers, but the simple fact is that there is no choice but to purge the banks of these toxic loans. The addition of risk-sharing clauses at the insistence of the Green Party may have helped to ameliorate the strong feelings that surround the new agency but there are still understandably huge concerns in many quarters about whether it can actually work.

If the discount pricing is right and with small incremental growth rates in commercial property prices of a couple of percentage points a year, Nama could break even or better within a decade - and that would be a good deal for taxpayers and the country.

For all its imperfections, Nama looks like the most appropriate solution to the problem, although many argue that bank nationalisation should also accompany it.

Whatever the right answer, we need to see credible and realistic valuations applied to property assets this week and safeguards put in place to protect the public interest.

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