By the end of the year, Ireland's government will start buying up €90bn of highly risky land and property loans, much to the relief of the country's struggling banks. Writer Michael Imeson

What is it?

Ireland's Fianna Fail government is creating a National Asset Management Agency (NAMA) to take risky land and property development loans off the books of the country's banks. The government published its 'bad bank' bill last month, and a heated parliamentary debate started a few days later.

Banks are in favour because it gets them out of a hole, but opposition parties and academics are against it, arguing that NAMA will overpay for dodgy loans, let banks off lightly and saddle taxpayers with costs.

Who dreamed it up?

The Department of Finance. Brian Lenihan, Ireland's minister for finance, says the bill is the outcome of a consultation process that took place after the draft legislation was published in July.

Ireland has been hit hard by the financial crisis. NAMA is a key part of its plans to get the financial system working properly again and restore the flow of credit to businesses and consumers. It is expected to buy loans with a potential book value of €80bn to €90bn.

What are the main provisions?

First, NAMA will buy participating banks' riskiest loans. Removing these - a mixture of performing and non-performing advances - from balance sheets will make banks safer for depositors and shareholders. The first loans should be purchased before the end of the year.

Second, the amount NAMA pays will be at a significant discount to the banks' book value of the loans because property values have fallen. Payment will be mostly in government or government-guaranteed bonds - highly liquid assets which will help stabilise the banks involved and support their lending strategies. Part of the payment will be deferred to ensure banks share some of the risk.

Third, NAMA will manage the loans "to obtain the best achievable return". It will collect interest due and pursue debts "so as to ensure its own income stream and to recoup the government investment over time".

What's in the small print?

Nothing will be possible without EC approval - Brussels will have the last word on how Ireland runs its affairs.

What does the industry say?

The Irish Banking Federation is over the moon. "NAMA is central to strengthening the balance sheets of systemically important institutions," it says.

However, the opposition Fine Gael and Labour parties have denounced the scheme. "Our concerns about the NAMA bill arise from its potentially colossal cost, its uncertain benefits and the unfairness of asking taxpayers to take responsibility for the reckless behaviour of developers and banks," writes Fine Gael deputy leader Richard Bruton in a letter to the finance minister. Opponents' alternative proposals entail bank nationalisation.

How much will it cost?

Forty-six academics wrote to the Irish Times criticising NAMA. "Current estimates are that the state may issue agency bonds worth upwards of €60bn in total for the €90bn book value," they write. However, judgements from court cases indicate the true value of the loans to be closer to €30bn - so NAMA will pay double what it should, allege the academics. By overpaying, the state will end up transferring to private individuals a sum close to the entire tax take.

What do the legislators say?

"The proposals to establish NAMA have been endorsed by the European Central Bank, the IMF, the OECD and others," says Brian Lenihan. "It is now clear that NAMA is the most effective solution to the issues confronting the banking sector and the economy."

And the law of unintended consequences?

If NAMA proves to be a soft touch and does not pursue borrowers for their debts, it could distort the market and put other borrowers at a disadvantage.

Could we live without it?

For Ireland's bankers, the answer is an emphatic no.

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