Thursday, October 15, 2009

Economics 15/10/2009: Exclusive - Oh, We All Make Mistakes

Let me confess to you - we all make mistakes. DofF and myself and the rest of Nama analysts. Let me first outline the mistake we all made. List its expected impact. And then explain why some of us made it.

Mistake: The entire analysis by DofF (see their Table 5 or my Table 1 here or here) is based on the condition that between 2010 and 2013 - for 3 years - there will be no rolling up of interest on loans that are non-paying. Furthermore, starting with 2013 and until roughly 2017, the numbers produced by DofF on yields (again see my Table 1 reproducing and explaining their results), assume that only some of the previously non-performing loans will begin performing.

The size of this error: In reality, if 40-60% of the loans are not paying interest at all today, assuming things are not going to deteriorate into the future any more, 2010-2012 free-of-charge roll up interest on loans will be estimated at:
Principal: Euro77bn-Euro9bn=Euro68bn
Full yield: 6%pa (DofF own claim) - Effective yield 2.4% in 2010, 3% thereafter (DofF own figures), so that:
Roll-up rate: 2010=3.6%, 2011=3%, 2012=3%
Cost of roll-up: 2010-2012=0.036*(68bn-1bn)+0.03*(68bn-2bn)+0.03*(68bn-4.5bn)=Euro2.304bn+1.98bn+1.905bn=Euro6.189bn

Conclusion: DofF estimates and my own estimates in my previous post (see here) do not include additional roll up charge of at least Euro6.2bn!

Thus even under the DofF original projections, Nama will yield a real loss to the taxpayers.

Now, why we made this error? Because none of us on Nama-critics side could have imagined that the Government will give defaulting developers 3 years interest-free loan to sort themselves out! And yet, this is exactly what Nama appears to be doing... what else, but a 'gift' or a 'rescue' can one call an act that deed Euro6bn worth of rolled up interest to a defaulting developer?..

Parahprasing my favorite book of all times:

"Curiously enough, the only thing that went through the mind of the Minister for Finance as the NAMA losses mounted beyond the wildest expectations of the Department was "oh no... not again!" Many people have speculated that if we knew exactly why the Minister had thought that, we should know a lot more about the nature of the universe than we do now."