Ireland is likely to pass ‘bad bank’ legislation

In a huge financial gamble, Irish lawmakers are expected today to pass a bill creating a so-called bad bank that would pay the country’s biggest banks more than $80 billion for troubled real estate loans.

The bill seeks to end a crisis that has brought stock prices down 75% from their 2007 peak, sent interest rates surging and destroyed Ireland’s status as Europe’s most dynamic economy.

Real estate prices have on average dropped 50% since peaking in 2007, and bad debts at lenders are surging.

Ireland’s economy shrank in 2008 for the first time in a quarter-century. The recession deepened this year, with the government forecasting a contraction of almost 8%.

“This is our biggest financial experiment by far,” said Eoin Fahy, an economist at KBC Asset Management in Dublin. “It’s another step in solving the Irish crisis.”

Since the bad-bank plan was outlined in April, Irish financial stocks have almost doubled in value. The government has already injected billions of dollars into Bank of Ireland and Allied Irish Banks and nationalized Anglo Irish Bank Corp.

The government predicts the bad bank will make a profit over its life span, but critics say it will saddle taxpayers with assets worth far less than what the government will pay.

Opponents including opposition political party Fine Gael also say banks will hoard the cash rather than lend as they try to rebuild their capital while bracing for fresh losses.