RISK-SHARING MEASURE: BANKS AND building societies will be on the hook for some [euro]2.7 billion of the [euro]54 billion bond issue that will fund Nama's purchase of their property-related loans if the "bad bank" fails to make a profit.

Minister for Finance Brian Lenihan said "around 5 per cent" of the overall price paid for the loan assets will be in the form of subordinated or second-class bonds.

Such bonds "put the banks at risk if Nama were to lose money, which is not our expectation, without giving them an upside in relation to its gains," he said.

The risk-sharing measure was criticised as too modest in scale by president of Siptu Jack O'Connor and by Friends First chief economist Jim Power. The latter said the Nama legislation should be amended to increase the risk-sharing element of the plan.

Opening the second-stage Dail debate on the Nama legislation, Mr Lenihan said the issue of subordinated bonds was a means of de- risking the Government's [euro]7 billion allowance in respect of the estimated long-term economic value of the loans going into Nama.

The loans in question are estimated to have a current market value of [euro]47 billion, so the estimate for long-term value brings the total price that Nama will pay to [euro]54 billion.

This represents a discount, or "haircut", of about 30 per cent under the [euro]77 billion book value of the loans.

In addition to the issue of subordinated debt, Mr Lenihan stressed that the Government planned to introduce a levy on the banking system if Nama had a deficit whenever the agency is eventually wound up.

He also pointed out that the State now owns 100 per cent of Anglo Irish Bank and has a "substantial" economic interest in Allied Irish Banks (AIB) and Bank of Ireland.

"Those who argue that I am transferring value to shareholders must agree that this is very much reduced by the fact that the State is in itself a shareholder for a substantial part of the system," the Minister said.

"The protections for the taxpayer of the risk-sharing mechanisms, and if necessary a levy, will ensure that any unjust enrichment of private shareholders by paying an allowance over current market value can be recouped. But if Nama makes money this will accrue to the taxpayer."

Responding to the Minister's speech, Mr O'Connor said holding back "just 5 per cent" of the total bond issue for subordinated paper was "relatively insignificant" in the context of the overall financial risk in the project.

"To add insult to injury for the Irish taxpayer, the Minister repeatedly provides assurances that he will introduce a banking levy to recoup the losses if Nama overpays, yet there is little comfort for the taxpayer that this will actually happen as there is no legislative provision for this."

Mr Power of Friends First said the amount of subordinated bonds to be issued was "definitely at the lowest end of what would have been expected".

There had been an expectation that there would be a "much greater" level of risk-sharing in the plan. "It makes a nonsense of the whole issue of risk-sharing," he said.

Originally published by ARTHUR BEESLEY Senior Business Correspondent.

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