Ireland is paying for ‘huge’ real estate mistakes that helped push the economy into the worst recession in its modern history, according to the only chief executive to survive a cull of the country’s top bankers.

Demand for homes, stores and offices built outside the largest cities and towns during the country’s decade-long boom may not recover for five years, said Fergus Murphy, CEO at EBS Building Society, which provides one in five Irish mortgages.

‘Many of those developments are likely to be severely challenged,’ Mr Murphy, 45, said in an interview last Friday, adding that he expects a quicker recovery in Dublin. ‘We are not the Celtic Tiger anymore.’

Irish property prices have fallen on average by half over the last two years, as the global financial crisis froze credit. The government is setting up a so-called bad bank to purge lenders of real estate assets, restart lending and reignite an economy that will shrink about 7.5 per cent this year.

‘I have my bad days but on balance I would be optimistic’ on the economy’s prospects, said Mr Murphy.

He is the only CEO of an Irish bank or building society not to have been replaced since the government stepped in to rescue the financial system last year. He joined EBS in 2008, three years after the Dublin-based company started accelerating lending to property developers.

Prime Minister Brian Cowen’s government last year guaranteed Irish banks’ deposits and some of their debts. The state has also pumped 3.5 billion euros (S$7.23 billion) into the country’s two biggest lenders, Bank of Ireland Plc and Allied Irish Banks Plc.

In January, Finance Minister Brian Lenihan nationalised Anglo Irish Bank Corp after chairman Sean Fitzpatrick resigned because he failed to fully reveal his loans from the lender.

‘The sins of the few have polluted the whole sector,’ Mr Murphy said. ‘The dirty linen was washed in public, heads have rolled, there has been accountability, and there probably needs to be some more.’

Source: Business Times, 24 Nov 2009

It will create agency to buy up bad property loans at discount from banks

(DUBLIN) The Irish government, faced with a firestorm of falling property prices, is trying to prevent a national drama from becoming a disaster by providing huge guarantees to the loan market.
The figures speak for themselves: house prices, which began to boom on the back of the so-called Celtic tiger economy in the mid 1990s, have fallen by 30-40 per cent from a peak in 2006 and are continuing their downward spiral.

The government is now working on a scheme to provide support of 90 billion euros (S$185.8 billion), an astronomical sum working out at about 22,500 euros per head for Ireland’s population of just four million people.

The plan is to create a National Assets Management Agency (NAMA), which would be a so-called ‘bad bank’ to buy up bad and doubtful property loans at a discount from the country’s ailing banks.

Lawmakers in recession-hit Ireland are cutting short their summer holidays to discuss legislation to set up the bank, which the finance ministry sees as one of the most far-reaching economic measures in the country’s history.

Under the scheme, the government is to take on loans equivalent to roughly a third of Ireland’s gross domestic product (GDP) of 182 billion euros in 2008.

Most of the loans are in Ireland, but some have been made for activities in Northern Ireland and Britain, and in places far farther afield.

The property crash has generated widespread distress in Ireland.

But banks have so far not enacted widespread default procedures, nor put large numbers of seized homes on auction, and have even held back on shedding staff who worked in now depressed mortgage activities.

The implosion of a property bubble fuelled by cheap credit, which drove up the prices of property during the decade of the ‘Tiger’ boom, has left a legacy of bad loans on the books of the country’s financial institutions.

It has led also led to banks showing a reluctance to lend money.

The mega guarantee plan is seen as removing a big obstacle to the flow of credit to the economy as a whole, and also staving off the risk of widespread mortgage defaults and the national trauma that would follow.

Lawmakers hope that details of the key issue of the discount – the so-called ‘haircut’ – will be outlined by Finance Minister Brian Lenihan when the Dail (parliament) reconvenes on Sept 16.

Publishing a 136-page draft law for NAMA last month, Mr Lenihan denied that it was effectively a bailout for struggling developers and builders.

‘Anyone who owes money before NAMA continues to owe it and is expected to repay the full amount of the debt,’ he said.

He also said that the method of valuation ‘will recognise that the current market for property- backed loans and the underlying assets are very illiquid and will not require the banks to accept ‘fire-sale’ values’.

NAMA would also not be guided ‘by the property prices and expectations regarding property prices that underpinned the original lending decision.

‘It will aim to set a reasonable price having regard to a longer-term perspective on the property market,’ he stressed.

The Irish Times newspaper put the issue in the starkest terms.

Deciding the writedown, it said, will ‘represent a juggling act between the need to price the loans realistically and not force the banks to accept losses on a scale which lead to their collapse’. — AFP

Source: Business Times, 11 Aug 2009