COLUMN-Irish bad bank could teach Germans a lesson: Paul Taylor

-- Paul Taylor is a Reuters columnist. The opinions expressed are his own --

PARIS, July 31 - A few months ago, the big question in Europe was whether Germany would bail out Ireland if the Emerald Isle defaulted after a massive property bubble burst.

Now Irish Finance Minister Brian Lenihan has come up with a bill to take risky property loans with a book value of 80-90 billion euros off stricken banks' balance sheets that could teach the Germans a lesson or two.

The plan has a good chance of working because Irish banks are already so behoven to the government that they have no choice but to comply, and because it's easier for a state-run "bad bank" to manage and run off the underlying property and related assets than to handle corporate loans or opaque derivatives. No wonder battered Irish bank shares rose 7 percent on average on Friday.

But the key issue of the valuation of the assets and the discount at which they will be transferred remains to be resolved -- Lenihan will announce the magic formula for the haircut on Sept. 16.

The valuation will determine whether banks that have already received government guarantees and capital injections will need to raise fresh capital, from shareholders or more likely from the state, to stay in business. The temptation for the government will be to fiddle the value to protect the banks in the short term.

Even if Lenihan says he is "approaching a ballpark figure" for the discount NAMA will demand from lenders in exchange for the property loans, valuation remains the key conundrum which few, if any, countries have yet resolved.

A standard rule of thumb is that if the banks want to sell, the government must be overpaying. But if the price is realistic, the banks won't want to sell. The government's aim of calculating a "longer-term economic value" suggests NAMA will pay over current market prices to spare banks a fire sale now.

Nevertheless, Lenihan's plan looks far more likely to succeed than the duff bad bank law which the German government pushed through parliament this month. That which would effectively park toxic securities in special purpose vehicles for 20 years in the hope of recouping as much as possible of their value once the financial crisis ends.

Only a handful of German banks seem likely to enter the scheme, which is voluntary, because it involves no genuine transfer of risk from the banks to the taxpayer, and hence no resolution.

In Ireland's case, even if the scheme is notionally voluntary, the banks have no choice. The government saved them from collapse last year by guaranteeing their liabilities and has a 25 percent indirect equity stake in the two biggest lenders, Bank of Ireland <BKIR.I> and Allied Irish Banks <ALBK.I>.

The other factor in Ireland's favour is the nature of the assets. It should be easier for a government agency to manage a large portfolio of loans secured on property than act as banker to companies and counterparties in the financial markets. In this sense, Germany's problems are less easy to solve.

The Irish and German schemes do, however, share one flawed feature: they both aim to protect the taxpayer from any losses. The government says Irish banks will retain a liability to pay a fee in perhaps 10 years' time if the National Asset Management Agency (NAMA) receives less than it paid for the assets.

Uncertainty over the potential final fee could make it harder for the banks to raise private capital and impair their willingness to resume lending to the "real economy". This is one area where both the Irish and the Germans should think again.