Finance minister Brian Lenihan: needs to get credit moving back into the economy

Ireland's reputation internationally took a further battering last week as it emerged that the value of property developer loans being transferred from the banks to the National Asset Management Agency (Nama) is expected to be lower than original estimates.

There was always an expectation that the original estimates of a 30% haircut on the loans would change as Nama uncovered more details on the banks' loan books.

However, the discovery through the Sunday Tribune that some Irish bankers approved loans to developers without valuing the property themselves or without thoroughly investigating the assets they were taking security on has surprised many international fund managers.

Standard & Poor's (S&P) decision to downgrade its credit ratings on the Irish banks for the third time is just more bad news the Irish banks could do without. S&P said that it expects "loan losses on bank lending to the Irish private sector to peak at about 4.6% or €16bn in 2010, and to total about 10.7% or €37bn over the period from 2009 to 2011".

The rating agency also revised its assessment of gross problematic assets (GPA) in the system to 15%-30% from 10%-20%. GPAs are S&P's estimate of a country's potential problem loans to the private sector and non-financial public enterprises in a severe economic downturn, such as that being experienced in Ireland, and includes restructured and foreclosed assets, as well as overdue loans, and nonperforming loans sold to special-purpose vehicles.

"Investors are just not interested in any banks with exposure to property deals from the last three years," said one senior London-based analyst. "The only reason they may be particularly negative towards the Irish banks is if they felt they were misled or even lied to and lost money on the shares."

Although no UK fund manager contacted by the Sunday Tribune believed they had been lied to, there was certainly a view that much more information on the quality of loans would be required going forward in order to persuade them to consider re-investing in the Irish banking sector.

"Many UK fund managers have lost a lot of money in the Irish banks and now that those banks are very small in a European context, there is just no reason to look at them anymore.

"In addition, their largest shareholder is the Irish government which has entirely different priorities to a typical institutional investor. That makes it very difficult to drum up interest in the shares," said one City bank analyst.

The Irish government's priority is not maximising shareholder return like an institutional investor such as a pension fund.

Although it will want to recoup its original investment, it has other considerations, including maintaining the stability of the Irish banking system and ensuring that credit begins to start flowing into the economy.

Most institutional investors' chief investment criteria is share-price appreciation, which is driven by profit growth.

Any government shareholding will also create an overhang in the shares. The Irish government has always said it does not want to be a long-term investor in the banks so share-price appreciation will be held back when investors are aware that a large tranche of stock will be coming to the market in the future.

One Dublin-based stockbroker said that the announcement from Nama next month on the discount applied to the first tranche of loans being transferred to the agency will end much of speculation on the amount of capital the banks need to raise. However, it will not reignite investors' interests in the Irish banking sector.

"We need to come up with a way to market the Irish financial sector abroad, but until there is any sign of a recovery in the economy, that is going to be very difficult", said one Dublin-based stockbroker.

"A sign of recovery in the UK economy could provide us with the glimmer of a possibility of an economic improvement here. The banks would obviously benefit from any domestic economic recovery but at the moment there is just no definitive indication that the UK is definitely on the road to recovery."

Although the British economy grew in the last quarter of 2009, emerging from the recession that started in the second quarter of 2008, the rate of growth was lower than expected. This has raised fears that it could easily slip back into recession.

This view was affirmed by comments from the manager of the world's largest bond fund, Bill Gross. In his February investment outlook for Pacific Investment Management Company, Gross said that investors should avoid debt from the UK and Ireland because of the heavy borrowing which may curb future economic growth.

Analysts are not expecting a recovery in the Irish economy until 2011 or late 2010 at the earliest.