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Bad loans to NAMA 'should be valued at current market price'

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Bo Lundgren, the former Swedish Minister for Fiscal and Financial Affairs, who appeared before the Oireachtas Committee on Finance and the Public Service at Leinster House yesterday. Photo: TOM BURKE

Bo Lundgren, the former Swedish Minister for Fiscal and Financial Affairs, who appeared before the Oireachtas Committee on Finance and the Public Service at Leinster House yesterday. Photo: TOM BURKE

Bo Lundgren, the former Swedish Minister for Fiscal and Financial Affairs, who appeared before the Oireachtas Committee on Finance and the Public Service at Leinster House yesterday. Photo: TOM BURKE

Loans going into 'bad banks' should be valued at current market prices for assets rather than hopes of improvement in the future, according to a key figure behind the rescue of the Swedish banking system in the early 1990s.

Bo Lundgren, Sweden's former minister for fiscal and financial affairs, told an Oireachtas committee yesterday that so-called 'mark-to-market' valuations would ensure the quickest possible recovery for the financial system.

He declined to comment specifically on Ireland's National Asset Management Agency, which is taking over up to €90bn of risky property loans in the banks.

But the agency is expected to ignore strict loan writedowns to current property values in favour of recent European Commission guidelines, which allow it to set an "economic" or "through-the-cycle" value on loans based on estimated long-term asset values.

Cautionary

Mr Lundgren highlighted the property-bubble-induced Jap- anese banking crisis, which spanned 15 years from 1990, as a cautionary tale.

"I was in Tokyo in 2002 and got the impression that valuations of assets in banks still weren't really marked to market, to put it mildly," he told the meeting. He said that transparency is key to success.

Mr Lundgren, currently head of the Swedish National Debt Office, said three things must be done to minimise a credit crunch stemming from a banking crisis. Firstly, liquidity must be maintained, which, he noted, central banks around the world have been doing.

Secondly, governments must intervene to restore confidence. He indicated that Ireland was correct in introducing the blanket guarantee scheme last September, similar to Sweden's move 16 years earlier, and rubbished suggestions that bondholders should not have been included in the scheme.

And thirdly, he said that the capital reserves in banks must be restored, in order to get them lending again. Mr Lundgren warned that any economic stimulus packages "won't mean anything if you don't restore the banking system."

Sweden, whose crisis stemmed from runaway commercial property lending following deregulation of its financial sector in 1985, ended up nationalising two banks, Nordenbanken and Gota Bank.

It created 'good' and 'bad' banks out of each institution and recapitalised them with the equivalent of €6.5bn -- or just over 4pc of gross domestic product (GDP) at the time. Ireland has injected €11bn to date into the three biggest banks -- or almost 7pc of GDP.

Mr Lundgren said Swedish banks racked up between €20bn and €25bn of credit losses during the crisis.

The International Monetary Fund estimated that Irish banks' losses will amount to €35bn.

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Sweden recovered half of the €6.5bn pumped into the two banks by 1996, Mr Lundgren said.

He added that taxpayers have now recouped all of the money, through dividends and gradual privatisation of Nordenbank (now called Nordea), which took over Gota in 1993.

"Your problems are greater than ours, to put it mildly," he said.


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