IRISH BANKING: NO LONGER ENAMORED WITH NAMA

C O N F I D E N T I A L SECTION 01 OF 02 DUBLIN 000183

SIPDIS

TREASURY FOR VIMAL ATUKORALA

E.O. 12958: DECL: 05/05/2019
TAGS: EFIN ECON PGOV PREL EI
SUBJECT: IRISH BANKING: NO LONGER ENAMORED WITH NAMA

REF: A. DUBLIN 167

B. DUBLIN 130

C. DUBLIN 086

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Classified By: PEO Chief Ted Pierce. Reasons 1.4 (b/d).


1. (C) Summary: The Irish government's plan to set up the
National Asset Management Agency (NAMA) to take on the banks'
property loan book is still riddled with questions, including
the value of the loans and the structure and operation of the
agency. The loans will be transferred to NAMA at a discount
which will necessitate a capital infusion at leading Irish
banks AIB and, perhaps, Bank of Ireland. While AIB raised
Euro 1 billion through bond issuance, management will likely
be forced to sell foreign assets and are trying
(unsuccessfully so far) to get employees to agree to
cost-cutting proposals. On April 30, AIB's Chairman, CEO,
and Finance Director all announced their resignations.
Further, a recent indication by Moody's that Ireland may lose
its AAA rating within the next three months places added
pressure on the Irish banks' ability to control costs and
raise needed capital. The Irish government may overpay for
the assets transferred to NAMA if it chooses to do everything
in-house. Thanks to steadier economic stewardship, the
government's hold on power looks a bit stronger but it is
still likely to take a hit in the June local and European
elections. End Summary.

NAMA STRUCTURE AND OPERATIONS REMAIN UNCLEAR
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2. (SBU) In the weeks following the announcement of the NAMA,
government officials have yet to provide details on the
workings or management of the program. Under the initial
announcement, NAMA would take over banks' entire commercial
and property development books. However, it is likely that
the proposal will be revised to exclude small loans. No
minimum threshold has been set at present. Under EU
competition rules, NAMA must be made available to
foreign-owned banks operating in Ireland. The impact of
these additional assets is currently unknown. The current
indication is that NAMA will end up with Euro 90 billion in
assets. However, the valuation of the banks' books has not
yet commenced and the final figure could vary significantly
from the current estimate. Further, the structure and
operation of NAMA remains unclear. Some analysts have hinted
that banks would continue to manage the assets under NAMA in
conjunction with the government. Recently, the National
Treasury Management Agency (NTMA) announced that it is
considering hiring outside consultants (most likely from
outside of Ireland) to take control of the assets on a
contract basis. The Irish government is likely to auction
off NAMA's assets over a period of several years (Ref A).

BANKS SCRAMBLING FOR EQUITY
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3. (SBU) The decision to transfer all commercial and property
development assets to NAMA is forcing banks to significantly
write down a large percentage of their assets. Both the
Irish government and the major banks have admitted that the
government capital infusion will be insufficient to absorb
extreme losses. Current expectations are that AIB will
require at minimum an addition Euro 1.5 billion. AIB
management initially indicated that it would consider selling
either its Polish subsidiary or its investment in M&T Bank.
While neither of these sales would generate the required
funds, they would remove AIB's riskiest assets from its
balance sheet. On April 27, AIB raised Euro 1 billion in a
surprise bond sale, which took advantage of rising demand for
government-backed debt. The bonds will be due on September
16, 2010 -- two weeks before the state guarantee scheme
expires. While Bank of Ireland still runs the risk of a
capital shortfall, its exposure to property and development
loans is significantly less than that of AIB and no further
capital-raising plans have been announced to date.

EMPLOYEES FIGHTING BACK
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4. (SBU) On April 20, staff at AIB overwhelmingly rejected a
proposal to accept a two year wage freeze and a mandatory 5%
staff contribution toward the bank's defined benefit pension
scheme. The vote was organized by the Irish Bank Officials'
Association (IBOA),who are planning to bring the issue
before the Labour Relations Commission. While AIB has
indicated a willingness to work with unions, it has not, thus
far, provided an alternative. While the leadership of the
other major banks announced their departures soon after the

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banking crisis arose, Minister of Finance Brian Lenihan,
continued to express confidence in the Chief Executive of
AIB, Eugene Sheehy. However, on April 30, Chairman Dermot
Gleeson announced he will stand down in July 2010, Sheehy
will retire once his successor is appointed, and finance
director John O'Donnell will leave in August. In advance of
an upcoming shareholders meeting, AIB will hold an
extraordinary general meeting, which will give taxpayers a 25
percent voting share. Both internal and external candidates
will be considered for the openings.

OUTSIDE EXPERTS QUESTIONING IRELAND'S PLAN
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5. (C) Moody's issued a warning on April 17 that it may
downgrade Ireland's AAA rating within three months due to
continued concerns about the banking sector. Further, a
group of 20 economists has called for Ireland to reconsider
the establishment of NAMA and instead take the banks into
temporary state ownership. In an opinion piece in the Irish
Times, the group stated "Nationalization will better protect
taxpayers' interests, produce a more efficient and longer
lasting solution to our banking problems, be more transparent
in relation to pricing of distressed assets, and be far more
likely to produce a banking system free from the toxic
reputation that our current financial institutions have
deservedly earned." On April 28, EmbOff spoke with Alistair
Hodgett of McKinsey and Company. He stated that Irish banks
in particular have historically been unwilling to utilize
outside consultants and that financial services specialists
question Ireland's ability to properly manage NAMA.

COMMENT
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6. (C) While Ireland has taken decisive action towards
managing its financial crisis, it is likely to hit a few
sizable bumps on the road. Without a solid credit review
system, the government risks significantly overpaying for the
assets that NAMA receives and may face difficulties managing
those assets once it receives them. The government is
seriously considering taking on outside help and has spoken
to financial institutions (some U.S.) about their asset
management capabilities. Due to the perception that the
government is handling the economic crisis better than it had
been, the probability of a mid-term general election is less
likely. However, the sorry state of the economy will likely
prompt the Irish electorate to punish Fianna Fail (the
leading party in the governing coalition) in the June local
and EU Parliament elections.
FAUCHER