Minister for Finance Brian Lenihan has said that the success of the National Asset Management Agency would not be based on any assumption of a return to the recent 'bubble' prices for property.
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Read the draft legislation on NAMA
The Minister appeared before the Joint Oireachtas Committee on Finance this afternoon to answer questions on the proposed legislation to establish NAMA.
He said it was a 'myth' that the amount NAMA would pay for troubled loans would compensate them for a recovery in values back to what he called 'the unsustainable peak property prices' of 2007.
Mr Lenihan told the committee he was willing to look at mechanisms aimed at sharing the risks between the taxpayer and the banks.
He also said Labour's proposal for nationalisation contained risks, and could affect the banks' funding options.
'Nationalising the entire banking system would inevitably result in Ireland's sovereign credit rating being downgraded from AA,' he said.
'This would result in increased debt service costs on the national debt, which the country can ill afford when it has so many other pressing calls on its resources.'
Banks may need further capital - Lenihan
This afternoon, Mr Lenihan repeated that - after transferring loans to NAMA - banks may need capital, and this could lead to the State's taking a majority stake.
He also indicated that the Government may end up with a majority stake in some banks after the creation of the agency.
'As I have already noted, some institutions may need capital after they have transferred loans to NAMA,' Mr Lenihan told the committee.
'This will increase the State's ownership in these banks and in some cases that may result in a majority shareholding but I believe this is a more discriminate and effective policy than blanket nationalisation.'
Fine Gael deputy leader Richard Bruton said that his party is worried that the NAMA legislation could prove to be a 'disaster' for the Irish economy.
He said there is 'alarming scope' for political involvement in decisions that NAMA would make and this would not be subject to oversight.
Mr Bruton told the committee that his party's proposal to create a 'good bank' would free up credit in the banks, something that he said is not guaranteed by the NAMA plan.
Labour's Joan Burton said that taxpayers fear the 'long term value' price that NAMA could pay for under-performing loans is a way of overpaying the banks.
She said this sounds like a 'phoney system'.
Minister Lenihan said the developers who caused the problems in the property sector will not be allowed to re-enter 'the business'.
Chartered surveyor John Mulcahy of NAMA told the committee that research showed that property prices can gain 88% in the seven years following a slump like the current one.
But Mr Lenihan quickly insisted that formula that NAMA will use to calculate property values would not factor in possible increases of 88%.
The Joint Oireachtas Committee is meeting to discuss the draft NAMA legislation ahead of a debate in the Dáil on 16 September.
Separately, the European Central Bank issued a written opinion on NAMA that broadly approves to the scheme but highlights concerns about the price the agency will pay for banks' assets.
The ECB says the measures in the draft NAMA legislation ‘should restore confidence in the Irish banking system’ but it goes on to say that the price of whatever assets are acquired should be ‘determined by market conditions’.
FitzGerald warns of dire consequences
Meanwhile, Fine Gael has distanced itself from comments made by former Taoiseach Garret FitzGerald in which he warned of the dire consequences for Ireland if the Opposition voted against the NAMA legislation.
He said this could leave the country vulnerable to intervention by the International Monetary Fund.
Fine Gael has said Dr FitzGerald made the remarks as an independent commentator and they were not the views of the party.
Speaking on RTÉ's Morning Ireland, Mr FitzGerald said that given a chance and some modification NAMA could work out.
Mr Fitzgerald said there would be difficulties with any approach.
He stressed that to restart the whole process - to abandon NAMA and adopt another approach - would take a long time.
'A defeat on this issue now, or indeed on the budget in December, could be very destabilising for our capacity to borrow abroad,' he warned.
He added that he not was 'awfully impressed' with the argument from 46 economists and professors in last week's Irish Times, saying the absence of key names was interesting and significant.
'The statement made that Ireland is moving toward a deficit of €30bn was quite irresponsible.'
Mr FitzGerald said it was vital to tackle the economic crisis without delay and that he was hopeful of a subsequent economic recovery.
