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Nama Q & A

16 September 09 06:17 GMT

By Kevin Magee
BBC Northern Ireland business correspondent

The Irish government is removing commercial land and property assets off the books of its six biggest lenders and placing them into a new state agency called the National Asset Management Agency (Nama).

Essentially, it is creating a "bad bank" to remove toxic assets from the banking system.

The assets going to Nama will include both healthy and impaired loans mostly on undeveloped land, and residential and commercial developments.

Only loans over 5m euros will be included.

What sort of money is involved in all of this?

It is estimated that between 80 and 90bn euros of debt is held by the six banks and will be moved into Nama.

The government will pay the banks for the assets. One of the big difficulties will be deciding what value to put on them.

It will not be based on how the banks valued them at the peak of the property bubble but on a notional "long-term economic value".

The difference between the two is being referred to as a "haircut".

It is thought this could be between 20 and 30%.

Is this all not a bit risky?

Yes it is.

If the haircut is too severe - and the amount of money the banks are being given is too low - then the capital base of the banks may shrink too much and the cash strapped government will have to step in and plug that gap by injecting yet more money into the banking system.

If this happened the government would insist on taking an equity stake in the lenders.

Re-capitalising the banks would add to the already spiralling national debt which taxpayers will ultimately have to service and repay.

How does Nama affect Northern Ireland?

It is thought that about 4.8bn euros of the property-related assets going into Nama are located in Northern Ireland.

These are the result of companies who have borrowed from the Irish banks to fund property development in Northern Ireland, or those from outside the jurisdiction, who bought commercial property in Northern Ireland with money loaned by the Dublin-based banks.

This led to fears that property in Northern Ireland could be subjected to a fire sale which would further depress the local property market and drive prices down even further.

The Northern Ireland's Executive's finance minister, Sammy Wilson, said there would be an advisory input from Northern Ireland into Nama to prevent this happening.

What will happen to the loans once they are moved into Nama?

If the loans are considered good and are performing, nothing will change for the borrowers.

They will continue to deal with their own bank and the loans will be administered in the normal way.

However, if the loans are bad or impaired, Nama may want to sell them, extend the loan period on them, or hold onto them in the hope the market will recover.

What does the Irish government hope to achieve from all this?

The aim is to remove the bad or impaired assets from the banks' balance sheets, and allow them to start lending again and get credit flowing to businesses and home buyers.

It is also hoped that it will enhance Ireland's international credit rating.

Who is paying for all this?

The Irish taxpayer will pay for it.

The government, through Nama, will pay the banks for the toxic or bad loans by way of bonds.

The banks can redeem the bonds at the European Central Bank and this will give them more capital.

The taxpayer, in turn, will service and repay the debt on the bonds.

A risk sharing mechanism has been inserted which means that the banks will get less money in the long run for the assets they have transferred to Nama if they perform particularly badly.

By this mechanism, it is argued the banks will be forced to shoulder some of the responsibility.

Will all this work?

Analysts at the credit rating agency, Moody's, have given support to the government's budget plans and the Nama bank rescue scheme, but painted a stark picture of gloomy prospects for the Irish economy over the next few years.

Is there an alternative?

The Irish government still has the option to nationalise the banks, or at least take a majority stake in the Allied Irish Bank and the Bank of Ireland.

The Anglo Irish Bank has already been nationalised.

There are those who feel that nationalisation will better protect taxpayers interests and produce a more efficient and longer lasting solution to the Republic's banking problems.

What banks are involved?

The assets to be transferred to the Nama will come from the same six banks that are covered by the Irish bank guarantee scheme - Allied Irish Banks , Bank of Ireland, Irish Life and Permanent, Irish Nationwide Building Society, EBS Building Society and the nationalised Anglo Irish Bank.

The Ulster Bank, which is owned by the Royal Bank of Scotland, is not included, but will be reviewing the Nama legislation.

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