People in a bar watch Brian Lenihan, Ireland’s minister of finance, present the supplementary budget in Dublin, Ireland, on Tuesday, April 7, 2009.

The Irish government may be about to become a landlord in some of the worst property markets in Europe as it tries to rescue the country’s biggest banks without having to follow the UK with a wave of nationalization.

Finance Minister Brian Lenihan said that the new government agency announced Tuesday to take over property loans from banks worth as much as €90 billion ($119 billion) will “work them out over time.”

“We don’t need any bailout here in Dublin,” Lenihan said in an interview with Bloomberg Television yesterday. “We are adaptable, we are agile.”

The tactic mirrors Sweden in the 1990s and governments in eastern Europe after 1989. Ireland is trying to cope with the fallout from a property crash as what was once western Europe’s most dynamic economy shrinks at the fastest pace in the euro region.

Since peaking in January 2007, house prices have dropped 17.7 percent, while commercial property values slumped 37.2 percent in 2008, the most on record, according to Investment Property Databank Ltd. in London.

“The economy is paralyzed because of the lack of flow of credit,” Foreign Minister Micheal Martin said yesterday in comments broadcast by RTE. “Doing nothing is not an option.”

Mixed headlines

The plan came as part of an emergency budget unveiled late Tuesday. The government raised taxes and slashed spending to narrow a swelling deficit.

The Star newspaper said yesterday the government had “crucified” taxpayers, while the Mirror, another tabloid, said “the only people laughing are bankers and builders.” The Irish Independent said the plan may be “a first step in our recovery from economic disaster.”

The economy will shrink almost 8 percent this year and 2.9 percent in 2010, Lenihan said. That contrasts with growth averaging about 6 percent in the decade through 2007, which helped quadruple house prices.

Against that backdrop, bank bad debts are surging. Dublin-based Allied Irish Banks Plc, the country’s biggest lender, is owed about €47 billion by developers and property investors. Irish banking shares fell yesterday after Moody’s Investors Service downgraded the financial-strength rating on 12 Irish lenders, citing rising losses on property loans.

Allied Irish fell 22 percent to €1 as of 11.30 a.m. in Dublin, while Bank of Ireland fell 7 percent to 90 cents, paring earlier losses. The two banks have a combined market value of €1.8 billion.

‘Massive gamble’

Politically, the Fianna Fail-led government is taking a risk, according to the opposition.

The government “has taken a massive 90 billion-euro gamble on behalf of the taxpayer in bailing out the very property speculators and banks that dragged our economy over a cliff in the last few years,” said Richard Bruton, finance spokesman for the opposition Fine Gael party.

The loans will be transferred to a new National Asset Management Agency. The state expects to pay “significantly less” because of slumping land values, Lenihan said.

“The government will be taking a punt on the eventual recovery of the property market, which will happen,” said Alan Dukes, a government-appointed director at Anglo Irish Bank Corp. and a former finance minister. “If they take over the stuff either for free or a big markdown, they could make some money out of it in five or six years time.”

Swedish route

Ireland is shunning the route taken by the UK of insuring bad loans. Instead, it’s drawing on a plan deployed by the Swedes. In 1992, Sweden created an asset management company, Securum, to pool toxic loans the country’s banks accumulated after deregulation in the 1980s.

Securum took over batches of credit, with the mandate of unwinding portfolios with more than 1,000 clients and those that had a book value of more than 50 billion kronor ($6.1 billion). More than half of Securum’s loans consisted of property accounts, and the company combined assets into units before winding some up or selling the holdings.

In eastern Europe, governments recapitalized banks, clearing out bad loans before they were sold on the stock exchange or to foreign investors.

The lenders were state-owned, specializing in foreign trade, domestic savings or specific regions. They were saddled with bad debt as corporate clients struggled to adapt to competition from the west and industry collapsed.

‘Bad bank’

“Finally, we have a bad bank,” said Emer Lang, a Dublin- based analyst at Davy, Ireland’s largest securities firm. “The government is plainly doing everything possible to avoid nationalizing the banks.”

Lenihan’s plan includes a possible charge to the banks in case the agency fails to recoup its costs over coming years as it takes on the property investments. The government also said it will take a stake in the banks if the “crystallization of losses” stemming from the plan means banks need extra capital.

“The question of whether the banks will need extra capital depends on the size of the haircut the banks have to take,” said Lang. “That’s the big question now.”

Source: Bloomberg