Saturday, October 31, 2009

Economics 31/10/2009: Latest data on Irish Resident Foreign Assets Holdings

CSO released (yesterday) latest data on Resident Holdings of Foreign Portfolio Securities. Charts below illustrate the trends.

First the aggregate stuff:
Notice that 2006-2007 overall trend implies peaking of foreign assets holdings by Irish residents at 2007, and a decline in asset holdings in 2008 to the levels below those recorded in December 2006. This is clearly reflective of the general external crisis in asset markets and is expected to record even further and more dramatic deterioration in 2009. Holdings of bonds and notes also declined from a peak on 2007, but less dramatically in relative terms - reflective of flight to safety into public debt markets by many investors. Again, similar trend to global. Equity holdings took the most sever beating, in line with global markets.

One interesting point is that Money Markets instruments holdings (not plotted above) have also declined in 2007 and 2008. This suggests two idiosyncratic developments in Ireland:
  • risk reductions took place in 2007, well before the full-blown global crisis of 2008, but in line with a financial markets crunch that began in August 2007;
  • both cash and equities were likely to have been used by Irish residents to offset leveraged losses (these are the most liquid instruments that can be used readily to meet margin calls) and this process was on-going in 2007, suggesting serious leveraging exposure to derivatives markets in Irish resident portfolios - a conclusion that would time declines in money markets instruments back to August 2007, when derivatives markets collapse triggered subsequent run on equities).
Now to some more detailed sub-categories of assets. Starting with total foreign asset holdings by country of asset origin:
There is a clear indication here that Irish resident portfolia are heavily geared toward UK and US assets (nothing surprising, as these allocations are only slightly ahead of global diversified portoflia bias toward these two countries). There is also present a relatively heavy allocation bias toward European and EEC securities. However, the real area of geographic diversification imbalance is found amongst the middle income (BRICs) and emerging markets allocations.

Ditto for bonds and Notes:
In terms of Equity allocations:
There is a clear imbalance in Irish resident positions with equity exposure to only a select subset of OECD economies. There is virtually no presence of high growth economies in the overall equity portfolios in Ireland.

Friday, October 30, 2009

Economics 30/10/2009: Assets/Liabilities data - How IFSC beats domestic investment sectors

See as ever entertaining press release from Ryanair below.

Per CSO release today:
End-December 2008, Ireland’s international investment position (IIP) was:
  • stocks of foreign financial assets of €2,194bn - a drop of €76bn on the end-2007 level of €2,270bn
  • liabilities were down by almost €7bn from €2,307bn to €2,300bn
  • Irish residents therefore had an overall net foreign liability (or deficit) of just over €106bn at the end of last year, up over €69bn from 2007 figure of €37bn.

Now, decomposition of these net liabilities is telling:
In overall commercial financial sector:
  • Monetary financial institutions (MFI - i.e. credit institutions and money market funds) had assets amounting to €1,065bn at the end of 2008. On the liabilities side, the MFI sector accounted for €1,146bn so total net liabilities of MFI sector in Ireland were at €81bn.
  • Other financial intermediaries (OFI i.e. investment funds, insurance companies and pension funds, asset finance companies, treasuries, etc) accounted for €980bn of foreign assets. OFI liabilities were €921bn, implying net assets (not net liabilities) of €51bn.
Thus, our commercial financial sector at the end of 2008 had foreign assets of €2,045bn (or over 93% of total foreign assets) and liabilities to non-residents of €2,067bn (or almost 90% of total foreign financial obligations), resulting in a net foreign liability of €21bn.

But the real gem is in the bottom section of CSO report. For months now CSO and Ireland’s CBFSAI were at pains to distance themselves from the IFSC. Every time someone pointed to a massive debt mountain Ireland Inc is bearing on its (private sectors’) shoulders, our Central Bank shouts ‘Foul – it’s all the fault of the IFSC’. Few (including myself) made arguments that this is too simplistic: IFSC is both an asset and a liability to our economy, and thus one cannot simply ignore its debts when one wishes to do so.

Well, CSO’s data actually shows that IFSC is hardly a culprit in the All-Ireland race to become a leading sector in net liabilities: “At the end of 2008, IFSC assets abroad amounted to €1,663bn or over 81% of the sector’s foreign assets (and almost 76% of Ireland’s total foreign assets).” IFSC liabilities stand at €1,646bn (nearly 80% of the commercial financial sector aggregate and over 71% of Ireland’s total foreign liabilities).

Yet IFSC recorded a net asset position at the end of 2008 of almost €18bn. While much smaller in size relative to IFSC, non-IFSC commercial financial enterprises (17% of total foreign assets and 18% of total foreign liabilities) have managed to run up a net liability of €39bn. That is a swing of €57bn between IFSC’s healthier books and non-IFSC’s sicker ones.

Think non-IFSC guys are now firmly on track to win the leading position in that All-Ireland race to highest indebtedness? Nope. The monetary authority, general government and non-financial enterprises had end-2008 foreign assets of less than €149bn (about 7% of the total) and liabilities of almost €234bn (just over 10% of the total). So the public sector net liabilities were a whooping €85bn, a swing against IFSC position of €103bn.

Scary stuff? Well, not yet - look at the following charts:
Chart above shows assets side of our International Investment Positions (IIP). All point to clear declines in 2008, except for 'Other' (aka derivatives written by our speculation-prone folks) and 'Direct Investment' (aka completion of Bulgarian and Romanian property syndicates)...
Chart above illustrates liabilities side of our IIP. All liabilities are up except for FDI into Ireland (which is falling - more on this below), and Portfolio Investments - which were hammered by global equity markets meltdown.

So net positions next:
Clearly, comments in the charts are self-explanatory. Good stuff (FDI) is falling, bad stuff is rising (Portfolio Investment Liabilities, Other Liabilities and Total Liabilities)... But take a closer look at Foreign Direct Investment (FDI) into Ireland, and our Direct Investments out of Ireland:
No more comment needed.

The last standing is the pesky IFSC issue - is it a problem for clean Ireland Inc, or is it actually an asset for lagging Ireland Inc? Take a look:
Conclusion - obvious. Can we get the IFSC guys to run our domestic financial services sector? Please!

Why one has to love Ryanair? Because it does what it promises on the tin:
No comment needed. As always.

Economics 30/10/2009: Reliance or dependency

Quick points on post-Nama recapitalisation, credit flows from ECB to Ireland and Frank Fahey encounter with an egg...

I have done some sums on demand for equity capital by Irish banks post-Nama. Assuming underlying conditions for loans purchases as outlined in Nama business plan, using 6% core equity ratio as a target (remember, this is a lower target by international standards) and assuming no further deterioration in the loans books quality post-Nama:
  • AIB will require €3.2-3.5bn in equity capital post-Nama;
  • BofI will need €2.0-2.6bn;
  • Anglo will need €4.5-5.7bn;
  • INBS/EBS & IL&P will require total of €1.1-1.2bn.
  • Total system demand for equity will be in the range of €9.7-12.4bn.
Approaching the same issue from the angle of Risk-Weighted Assets, system-wide demand for equity will be around €10.8bn post-Nama. This will extend Nama-associated rescue costs to:
  • €54bn in direct purchases;
  • €5bn in completion 'investments' with estimated further €3-5bn in future completion additional funds;
  • €1bn in legal, advisory and management costs;
  • €9.7-12.4bn in equity injections;
  • Past measures €11bn.
Net of interest costs and losses, total price tag looks now like €84-88.5bn. This, for a system that can be fully repaired through a direct equity-based recapitalisation at a cost of roughly €32bn.

Our agriculture is the heaviest subsidised in the EU (and indeed in the world). This fact has never troubled our policymakers, as if subsidies are a sign of industry viability and strength, as long as they are being paid by other countries taxpayers (as in the case of CAP).

Now, we have become the biggest ECB liquidity junkie by far. Table below from RBS research note shows the dramatic level of financial life support our economy requires.
Note that the above list of countries includes heavily crisis-impacted Spain, the Netherlands, Belgium, APIIGS (less Ireland), aggregated in the 'Other' grouping. And yet... they all have larger economies than Ireland and smaller demand for liquidity injections.

Does anyone still believe that Nama can add liquidity to our economy? Or that such an addition can improve lending conditions? Apparently, ECB-own lending operations were not able to do so to date...

And on related note, there is an interesting quote from Dr Alan Ahearne in a recent article in the Southern Star newspaper (here):

"As one economist warned last year, ‘buying the assets at inflated prices would amount to a back-door recapitalisation of the banks’. Best practice ‘is for the banks to recognise the losses on these loans up front and sell the assets at fair market value’. Whose words? Dr. Alan Ahearne – now economic advisor to Brian Lenihan and one of the chief advocates for NAMA. Go figure."

Well, not much to figure, really - call this miraculous conversion a '€100K effect' triggered by new employment...

Oh, and while we are on Nama, here is an excellent 'Public Anger at Nama' account of the latest Leviathan encounter by Peter Mathews. I wonder if Senator Boyle and Frank Fahey get the point - people are angry at the way the country is mismanaged, but they are even angrier at being pushed into Nama.

Tuesday, October 27, 2009

Economics 27/10/2009: What credit flows data tells us...

There is a superb blog post by Ronan Lyons exposing the economic nonsense spun by Nama supporting 'economists' - read HERE. In case you still wonder who that 'mysterious' uber-adviser from Indecon was - well, might it have been Time Magazine-famous (see here) Pat 'Never-Heard-of-Before' McCloughan?..

An interesting data from the ECB: The annual rate of growth of M3 money supply has decreased to 1.8% in September 2009, from 2.6% in August 2009. This marks new deterioration in money growth. The 3mo average of the annual growth rates of M3 over the period July 2009 - September 2009 decreased to 2.5%, from 3.1% in the period of June 2009 - August 2009. Table below summarises:
The annual rate of change of short-term deposits other than overnight deposits decreased to -5.3% in September, from -4.1% in the previous month. This implies that banks are bleeding cash at an increasing rate. In the mean time, the annual rate of change of marketable instruments increased to -8.8% in September, from -9.3% in August. Hmmm - has this anything to do with more aggressive repo operations? Or with more aggressive re-labeling of what constitutes 'marketable' instruments? Or both?

On the asset side of the MFI sector, "the annual growth rate of total credit granted to euro area residents increased to 3.1% in September 2009, from 2.8% in August. The annual rate of growth of credit extended to general government increased to 13.6% in September, from 11.5% in August, while the annual growth rate of credit extended to the private sector was 1.1% in September, unchanged from August." So here we have it - the credit pyramid in full swing. Banks borrow against bonds issued by the state (increasing supply of 'marketable' paper to the ECB). The states promptly issue more bonds that are then bought up by the banks, increasing supply of credit to the governments.

In the mean time the real economy is taking more water: "...the annual rate of change of loans to the private sector decreased to -0.3% in September, from 0.1% in the previous month (adjusted for loan sales and securitisation the annual growth rate of loans to the private sector decreased to 0.9%, from 1.3% in the previous month)." [The latter number means that barring accounting shenanigans with re-classifying and restructuring loans, credit to private sector was falling even faster].

"The annual rate of change of loans to non-financial corporations decreased to -0.1% in September, from 0.7% in August. The annual rate of change of loans to households stood at -0.3% in September, after -0.2% in the previous month. The annual rate of change of lending for house purchase was -0.6% in September, after -0.4% in August. The annual rate of change of consumer credit stood at -1.1% in September, after -1.0% in August, while the annual growth rate of other lending to households was 1.5% in September, after 1.3% in the previous month." Again, the last sentence reflects increases in credit due to arrears (short-term lending to households).

So to summarise, economy is still tanking, while the governments are still monetizing new debt through the banks. Expect a bumper crop of profits from Eurozone financial institutions in months to come as they reap the gains of the government-financing pyramid.

Let me show you some illustrations based on ECB data:

First we have Government borrowing:
followed by non-MFIs
...and non-financial corporations
and finally by the households:

As commented in the charts, this data shows conclusively that the private sectors (non-financial corporations and households) have been:
  • accumulating liabilities in the years before crisis in a transfer of the debt off the public sector shoulders onto private economy shoulders; and
  • were unable to deleverage in the last 24 months since the onset of the financial crisis.
This implies that in years to come, weakened consumers and corporates will be exerting downward pressure on European growth, with interest rates hikes potentially inducing a destabilizing pressure on already over-stretched households and corporates. In this environment:
  • any talk about ECB and Governments' 'exit strategies' is premature, unless one is to completely disregard the credit bubble still weighing on non-financial private economy; and
  • continued public sector spending stimuli and ECB discount window-reliant monetary policy cannot be a workable solution to the crisis. Instead, there is an acute need for orderly deleveraging in the private economy.

Economics 27/10/2009: Recessions, Busts and Crunches

I am back from a very enjoyable (as always) trip to Paris and some 150km beyond. Superb retrospective of Pierre Soulages' work in Pompidou - a real master of true dynamism. A mouthwatering Hans Hartung print (some examples here) and two lovely Soulages' prints as well - all in my favorite gallery Paul Proute SA - were hard to resist, but given we are in a depression, while the French art market seems to be only in a recession, judging by prices, resistance was a-must.

One telling tale - at a lovely dinner with a small group of friends in the countryside, conversation took a quick turn to corrupt politics. Our French hosts were lamenting about the state of their country politics by pointing to a scandal surrounding Nicolas Sarkozy's plans to appoint his failed-lawyer son to head the Epad, the development corporation of La Défense (see a note here). Epad is a state-sponsored body and the French nation was literally lifted to its feet when nepotist Sarko tried to push his baby-faced offspring into the CEO seat. In return, I recalled for our friends the story of Bertie Ahearne arrogantly telling the nation that he gave state jobs to his cronies not because they provided him with money but because they were his friends. My French hosts couldn't believe that such a statement did not cost Bertie his job leading to years of public investigations and pursuits through courts. Nor could they believe that Bertie's friends are still, mostly, in their places of power.

Now, a couple quick notes relating our own troubles.

Stijn Claessens, M. Ayhan Kose and Marco E. Terro have published their excellent paper "What Happens During Recessions, Crunches and Busts?" (I wrote on it before based on the working paper version here) in Economic Policy, Vol. 24, Issue 60, pp. 653-700, October 2009. Here are couple interesting illustrations:
So per above, combined duration of contractionary segment of the credit crunch and housing price bust can be expected (on average) to last approximately 30 quarters (timing the current Irish crisis to last from Q1 2008 through Q2 2015 if the rate of house price bust and credit contraction here in Ireland was close to an average of the countries surveyed by the paper).

The latter 'if' is a serious assumption to make. Claessens, Kose and Terro show that the average bust/contraction is associated with a roughly 18% fall in credit supply and 29% decline in house prices. Of course, in Ireland, we are already seeing a 70% decline in credit supply and a 40-50% decline in house prices. So make a small adjustment - back of the envelope - to account for these and you get expected the current contraction/bust crisis to last more than 52 quarters, taking us well into the beginning of 2020 before the recovery truly takes hold.

And this dynamic is seemingly also in line with Claessens, Kose and Terro data on the impact of crises on GDP. 2008-2010 Irish GDP is expected to fall by some 13.5-15%. This is approximately 2.5 times the depth of the average adjustment associated with credit crisis and house price bust per Claessens, Kose and Terro, as illustrated in their chart reproduced below:
Oh, and for those 'advisers' who are telling Minister Lenihan that Ireland will recover from this crisis along the same trajectory as the 'average' OECD economy (the same advisers who are talking of 8-year cycles in property prices), here is how average Irish crisis is compared to the rest of the modern world history:
Only 4 countries so far have experienced a combination of Asset Price Bust + House Price Bust + Credit Crunch.

My second note of the day is about the effectiveness of fiscal spending as 'get-us-out-of-recession' stimulus. Given that the Government is now pre-committing itself to not cutting public sector pay, it is worth quickly mentioning that the Unions-supported idea that cutting public expenditure is only going to make our recession worse is simply untrue. A recent (July 2009) note by Fabrizio Perri of University of Minnesota, Federal Reserve Bank of Minneapolis titled "Comment on: Planning to cheat: EU fiscal policy in real time by Roel Beetsma, Massimo Giuliodori and Peter Wierts" provides an estimate of the fiscal expenditure multiplier for European economies. The number is 0.85... or, significantly less than 1. This suggests that cutting public spending will lead to a proportionately smaller reduction in GDP than the savings to be generated.

Here is an additional (excellent) note on the whole mess of fiscal multipliers. Adding to this, one has to recognise that Irish public spending is far less effective as a stimulus to the economy, as it is accounted for (to the tune of 70% of the total expenditure) by social welfare and wages - i.e. non-productive components. Thus, one can expect the above 0.85 multiplier estimated for Europe as a whole to be around 0.26-0.0.29. Which, in turn, means that any fiscal contraction in today's Ireland will likely result in a medium-term expansion of our economy. Then again, we already know this much from the 1980s experiences, don't we?

In reality, of course, taxing private economy amidst credit and asst price crises to continue wasting money on the current public expenditure is a sure way to extend and to deepen the recession, as:
  • Our public expenditure level was not sustainable for this economy even at the times of growth, let alone at the time of a severe recession;
  • Ireland is now likely to be on a path of permanently lower post-crisis potential GDP/GNP growth, so the cuts in public spending will have to take place no matter what delay in public expenditure adjustment the unions will force onto this Government;
  • We are facing the fastest and the longest increase in public debt (ex-Nama) in the OECD over the next 5 years and an additional open ended liability under Nama, both of which make it virtually certain that Ireland will emerge from this crisis as a fully insolvent nation.

Tuesday, October 20, 2009

Economics 21/10/2009: Ireland = the most leveraged SPV on Earth?

And so we now learn than Nama beast has mutated into a high-risk derivative game with ghost investors, imaginary assets and illusionary payoffs. We are, for all intent and purpose, in the BaNama Republic.

Here is the story: per Annex H of the original statement of intent to establish Nama (April Supplementary Budget 2009 : here), the state will set up a Special Purpose Vehicle (SPV) to issue bonds (Nama bonds) that will be guaranteed by the State. Per Eurostat analysis (here) these bonds will not be counted as Irish Government debt.

First point to be made – we are now the first developed country in history that is about to throw the weight of its entire economy behind a private undertaking of extremely risky financial engineering nature.

€54bn worth of Nama Bonds will be issued by this SPV. SPV will be 51% owned by private equity investors who will supply €51mln worth of capital. Total capital base of SPV will be €100mln. This SPV will be borrowing (by issuing bonds) €54bn – which means that on day 1 of its running, the SPV will be 54,000% leveraged or geared. This will imply that Irish Nama-SPV will be leveraged in excess of LTCM – the infamously riskiest of all major investment propositions that anyone saw in financial history before Nama SPV idea came to being.

Point two: the Irish state will be engaged in the riskiest derivative instrument undertaking of all known to man to date.

To cover up the farcical arrangement (with folks with €51mln buying €77bn worth of risky (but recoverable, by Minister Lenihan’s assertions) assets), maximum 10% of SPV value can be distributed in profits. 10% of what you might ask?

CSO submission to Eurostat states that: “The profits earned by the SPV will be distributed to the shareholders according to the following arrangement, which reflects the fact that the debt issued by the Master SPV will be guaranteed by the Irish Government:

  • The equity investors will receive an annual dividend linked to the performance of the Master SPV.
  • On winding up of the Master SPV, the equity investors will only be repaid their capital if the Master SPV has the resources; they will receive a further equity bonus of 10% of the capital if the Master SPV makes a profit.
  • All other profits and gains of the Master SPV will accrue to NAMA.”

Two possibilities: 10% of expected (by DofF) Nama profits or 10% of Nama assets?

In the unlikely event of 10% of assets, the lucky ‘private equity’ folks can get 10%*€54bn*51% share – or €2.754bn – on the original investment of €51mln. They face no downside other than their initial capital injection less whatever dividends they collect prior to default, as bonds are guaranteed by the State. I assume this is a fantasy land. But one cannot make any rational assumptions about Nama anymore.

In a more likely event, it will be 10% of Nama profits. Ok, per DofF, Present Value of Nama profit is €4.7bn * 10% * 51% = €239.7mln. With principal repayment this means they will collect a cool €291mln on day last of Nama existence if DofF projections stack up.

We know nothing about the dividends, but we do know that the dividends will be paid out over 10 years. For some sort of decorum the Irish Government will have to allow SPV to appear to be legitimate and therefore it will allow it to pay a dividend on assets managed. Suppose the dividend will be around ½ of the standard management fee for assets, or roughly 100bps on revenue generating loans or 2.5% on net cash flow. Per DofF Table 5 of Nama business plan, this will add up to €12bn*1%*51%=€61.2mln using the first method or €61mln computed using the second method. In present value terms. Thus €51mln in initial investment will generate:

Scenario 1 – Nama works out per DofF assumptions = €352mln (inclusive of principal) – a handy return over 10 years of 690% or 21.3% annualized. Not bad for a government guaranteed scheme…

Scenario 2 - Nama loses money and is pronounced insolvent. Investors lose €51ml of original investment, but keep €61mln in dividends. 100% security, 0% risk...

Which brings us to the third point: as Irish taxpayers, we are now in a business of paying handsome returns to private equity folks (more on those below) in exchange for them covering up the true nature of our public finances. A good one, really.

Who owns this SPV? This is an open question. 51% will be held by ‘private investors’. 49% by Nama. 100% of liability will be held by you and me. Is this a Government throwing the entire weight of the sovereign state behind a privately held investment scheme? You bet.

But wait. Who are those ‘private investors’? Can Sean Fitzpatrick be one of them? Why not? Of course he can. Can Ireland’s non-resident non-taxpayers be amongst these? Why not? Of course they can. So as taxpayers we will be issuing a guarantee to tax exiles? Possibly. But wait, it gets even better – can the banks themselves be investors in SPV? Well, of course they can. Wouldn’t that be a farce – banks get to unload toxic waste on taxpayers and then make a tidy profit on doing so…

One way or another – parents struggling to put their kids through schools, elderly people struggling to pay medical care costs, single parents trying to balance work and raising family, young folks studying to better their lives – all of them and all of the rest of us will be bearing 95% responsibility of assuring that some ‘private investors’ will make a nice tidy profit, so Minister Lenihan and Taoiseach Cowen can go around the world claiming that Irish bonds that underpinned Nama were not really Irish bonds!

Which brings us to the fourth point: Why is Eurostat assured by this massive deception scheme to accept it?

Globally, G20 summits one after another have been focusing on how we will have to deal with the risks of the traditional SPVs and other ‘alternative investment’ assets classes that spectacularly imploded during the current crisis. Yet here, in a Eurozone country, a Government is actively setting up the most leveraged, highest risk SPV known to humankind. Surely there is a case to be made that the EU authorities should be actively stopping such reckless financial engineering instead of encouraging it?

The entire SPV trickery works because the Government has managed to convince the Eurostat that SPV will be fully operationally independent of the state. So far so good. But, Nama will sit on the board with a right of veto over SPV managerial and operational decisions: “The NAMA representatives on the Board will maintain a veto over all decisions of the Board that could affect the interests of NAMA or of the Irish Government.” Furthermore, Minister Lenihan and his successors will have veto power over Nama decisions and will be the final arbiters of Nama. Is that arms-length getting to finger-length?

At this point, there is only one institution still standing between the madness of the runaway train of Nama and the crash site of the SPV-high leveraged high finance gables with taxpayers money. That institution is ECB. The ECB will have to be concerned with non-transparent (Enron-like) accounting procedures that are being created by the Irish Government when it comes to accounting for Nama bonds. It has to be concerned if only for the sake of the Eurozone stability and its own reputational capital. Will ECB step in and tell this Government that enough is enough?

Monday, October 19, 2009

Economics 20/10/2009: Ahead of DofF

A quick announcement:
RDS Concert Hall 8pm Wednesday Oct 21st

HOW NAMA WILL LOSE €12bn: There's a Sounder Alternative
by Banking Expert Peter Mathews, MBA, FCA, AITI.

Peter is the only senior banker with experience in managing large distressed loans portfolio. His work, in collaboration with myself and Brian Lucey is featuring in the current issue of Business&Finance magazine. This should be very informative and worth attending. See Peter's excellent website in the issue of Nama costs:

We will also hold a Q&A session after the speech, with yours truly also on the panel.

Free for students.

A quick note:

Apparently the latest Government projections for 2009 tax intake are €31bn. Pre-budget estimate in April 2009 was €34bn, while January 2009 addendum to the Finance Bill was €37bn (here).

My forecasts earlier this year gave this figure (here) back in August, May (here) and April (here). In fact, since December 2008 I have been giving forecasts for revenue figures that were ahead of the official numbers produced by a sizable department responsible for doing these forecasts within DofF. Table below lists their projections before the April Budget:
Latest Government admission - €31bn... welcome to TrueEconomics, folks...

Economics 19/10/2009: A proud member of National Mediocrity

Sunday Sunday Business show on Today FM. Minister Lenihan commenting on the anti-NAMA economists (podcast here):

"What I notice about them is that there’s about forty of them. There is about two hundred economists in the state. Most of the rest of them have approached me privately and said that these gentlemen and ladies are wrong. But of course they are not prepared to say so publicly because in Irish academic class, people don’t criticise other people’s books. That’s part of our national mediocrity. ...If you look at the press in the United Kingdom or the United States, you’ll see robust academic criticism of others works but we’re reluctant to do it."

Karl Whelan has his view on this - read it here.

My view is a simple one. Want to have some criticism - compare publications records of Mnister's advisers to that of, ough, say Karl Whelan or Brian Lucey. Want to have some criticism - compare supporters and critics of Nama:
  • Stockbrokers and Irish Banks' economists - all with a major conflict of interest implied in their positions as their respective organizations will be the intended beneficiaries of Nama. In my books, this does not invalidate their points and analysis, but it does raise a question or two;
  • EU Commissioner who actually negotiated with Minister Lenihan Nama solution;
  • Ghosts of other - possibly independent - economists who have spoken to the Minister in private?..
  • 4 Nobel Prize winners, several senior faculty members from the top 5 Finance Departments in the world, and one former SEC Board Member;
  • 46 academic and practicing economists and finance specialists;
  • 4 authors of comprehensive analysis of Nama proposals (myself, Brian Lucey, Ronan Lyons and Karl Whelan - in alphabetic order) that provided more detailed and more accurate costings of Nama and alternatives than the one supplied by Minister's own staff;
  • 1 former banker - Peter Mathews - who has extensive experience in managing bad loans within a special division for such loans set up by ICC bank in the 1980s;
  • A range of independent economic commentators some with extensive finance experience in the past;
  • A number of top class finance entrepreneurs, including Dermot Desmond;
  • Hundreds of people from finance, international finance and economics who comment on this blog and the Irish Economy blog;
  • One Governor of the Central Bank who proposed significant changes to Nama that were subsequently taken out of context by His Intellectual Excellence's Government colleagues and reshaped into an unrecognizable watered-down versions to suit original Nama.
Not that excellence is measured in numbers (as Gallileo and Copernicus and many others have proven before), but you get the point.

As far as Minister Lenihan has a stomach to talk about mediocrity, I wonder how he feels sitting at the Cabinet table. Or how he feels about the Nama analysis being pushed forward by his staff - analysis that has been time and again proven as:
  • coming after the mediocre Irish economists put forward their figures; and
  • turning out to be wrong and proven to be wrong by the mediocre Irish economists.

One real sign of intelligence and excellence is ability to listen, seek truth and change your views/plans in response to overwhelming evidence that disputes one's original proposition. To date, after months of factual analysis by many of us, this Government has been showing complete lack of ability to do either one of the above.

Let us all be judged, then, alongside Minister Lenihan, as to where the real mediocrity in this country resides.

Sunday, October 18, 2009

Economics 18/10/2009: Soros-Nama, R&D spending, Pat McArdle v Morgan Kelly

Update 1:
Karl Whelan is very good on McArdleism - read here.
As does Stephen Kinsella (first hand account) - here.

Update 2: What Apple's latest numbers tell us about R&D investment

Apparently, our Montrose journos have no respect for both - the basic right of freedom of speech and expression and the basic premise that true patriotism is about telling the truth, not about donning 'green jerseys'... This is why I stopped watching majority of RTE programmes long ago - at least BBC (for all its biases) has balls to support freedoms of speech and expression.

Couple of housekeeping items... one on Nama and another one on Knowledge Economy, plus Pat McArdle on Morgan Kelly and more...

Reading through September 2009 interview George Soros gave to Bloomberg Markets magazine, I can across the following quote from the legendary speculator:
Q: "Is this economic contraction something new or something we've seen before?"
GS: "No, you haven't seen it before. Historically, you have the 1930's, the Depression, but since then, whenever you had a financial crisis, the authorities always took care of it and stimulated the economy, extended credit and got it going again. And that just made the bubble grow bigger. (Emphasis is mine) This time it is the end of an era and this is different from any of the financial crises that you have experienced in your lifetime."

The interviewer did not pursue any of the points made by Soros above in any detail. He moved on to the next question. This is a sad opportunity missed because what Soros was saying here (or hinting at) is of potentially great significance. If the current crisis is an end of an era of credit-fulled bubble then:
  • Restarting a new credit cycle is not a solution to the systemic problem, but another attempt to temporarily re-inflate the bubble. In terms of Nama, why are we assuming that the Irish economy needs another credit expansion, especially the one that is (hoped) to be restarted on the back of purely domestic credit injection? Ireland is a tiny drop in the ocean of global finance and an idea that we can, at the expense of our own taxpayers, relaunch a credit mechanism in this country's banking sector is patently absurd. It is equivalent to pouring a cup of water into a desert of quick sands in hope that life will return...
  • Even more fundamentally, if this is an end of an era of credit expansion-driven growth, then what will be the new paradigms for future growth? A topic worth exploring before we commit to a futile effort of reigniting lending in one of the world's most indebted economy.
  • Lastly, if credit-financed growth is the thing of the past, then will new growth path be steep enough to achieve returns on peak-of-valuations loans Nama is taking in? Most likely, the answer will be no.
The next question asked of Soros is even more significant:
Q: "Are we trying to have a pain-free crisis? Is a consolidation needed?"
GS: "I'm afraid that is the case. We should have taken the pain and recapitalized the banks. Instead of that, we kept them alive and gave them hope that they can rebuild their balance sheets, and that is going to drag and weigh on the economy for a long time to come. We suffer from an inability to face an unpleasant reality. We expect our politicians to effectively deceive us, to tell us things are better than they are. That is our weakness."

A brilliant statement, reflective much more of the Irish realities than of those of the US.
  • Nama is par excellence a 'repairing of balancesheets' exercise, not a recapitalization one (hence the Government is now committed to post-Nama recapitalization). My article in the current issue of Business & Finance magazine clearly shows that a recapitalization via direct purchase of equity is more cost efficient than Nama. It will also address the problem of capital adequacy, while leaving the banks to manage the loans. Soros is talking about this type of a solution. And yet, official Ireland remains indifferent to any proposals other than Nama.
  • We really do, culturally, ethically and economic policy-wise look into Government's mouth in hope of hearing them utter something re-affirming, something positive. We take distorted estimates for hope, half-truths for optimism and huge tax bills for 'necessary corrections'. If Nama will drag this economy down for many years to come, our innate desire to rely on the state for 'tough solutions' while we avoid the truth is going to hold us in this crisis for decades.
Oh, and there is an interesting note from Crimson Observer blog (here) - it looks like some old bubble-time hawks are jostling to position themselves as the buyers of distressed properties in Ireland as Nama bites into the market... Interesting. But taking this further - will Nama trigger re-transfer of defaulted properties back to the, pretty much the same, hands of old developers at a knock-down price? Possibly...

Short note from the land of high R&D spending (sorry 'investment'):

"The 908 million euro ($1.3 billion) goodwill write-down on Nokia Siemens Networks, ...certainly contributed to the unexpected 559 million euro ($833.9 million) loss reported by Nokia in the third quarter. However, Nokia had forewarned that it would be writing down the value of the business after successive quarterly losses. A more worrisome and unexpected trend, however, is the lackluster demand for Nokia's smart phones, essentially phones that double as mini computers such as the N97 and the E60. The company's share of that market globally fell to 35% in the quarter ending in September, from 41%."

So (quote above is from Forbes magazine) Nokia (aka Finnish economy) is suffering from:
  • Lagging position in smart phones (despite Finland having higher civilian R&D spending as a share of GDP than it's closest rival in smart phones market - the US);
  • Lagging strategy to the market - Nokia unveiled details of its forthcoming N900 phone in the middle of the third quarter, well after new launches by Google and Apple;
  • heavy competition in China and India from low-cost producers (despite Nokia's vast outsourcing and off-shore production network, partially financed by Finnish taxpayers).
Run through the above 3 points and you can see that R&D spending on labs and technicians has nothing to do with Nokia's woes. Simple business management, marketing, strategy and business processes flexibility are behind it losing ground to its rivals.

In contrast to Nokia, Apple just posted (Monday) a 46% increase in its fiscal Q4 earnings and higher revenue than a year ago led by better-than-expected sales of iPhones, Mac computers and iPods (here). You can read about Apple strategy in terms of introducing new products at higher frequency than its rivals and launching upgraded software to coincide with new products offerings in the above-linked article. But what actually put Apple back into the global competitiveness game was not just product innovation - it was i-Tunes concept for selling music and then Apple Store concept for selling hardware, followed by, yes - i-Phone APS online 'store'. It is retailing that reinforced product innovation for them - something that Nokia with its government-supported R&D spending programmes can't replicate to date.

Still want to chase Finns in putting more R&D spending onto the Exchequer books?..

The news that Pat McArdle (reported here) had a total meltdown in his challenge of Prof Morgan Kelly did surprise me. I have deep respect for Pat's work back in the Ulster Bank - he was one of the most knowledgeable bank economists of recent times and I always valued his research notes for an inimitable ability to link intuition and data. Ditto for Prof Kelly.

Hence, I was shocked to learn that Pat McArdle questioned Morgan's right to express his views. I certainly hope that Pat will publicly apologise to Morgan for this outburst. And I certainly hope that Kenmare organizers would have guts to openly defend Morgan's liberty to say what he wants on the subject of economics and economic policy when he wants to say it.

One would expect censorship to be despised and rejected in academic setting and amongst social scientists. Alas, I know first hand that this is where it is practised. For example, a birdie chirped to me recently that one department of economics in Ireland has recently explicitly banned its junior members (senior faculty of course said 'Non' to the ban) from speaking to the press or expressing their opinions in public on the matters of economic policy unless they obtain a prior consent of the Department Head. How's that for 'democratic' and 'socially active or relevant' academia? Standard job descriptions for academic posts in this country state that one of the parts of our work involves service to a broader community outside the halls of academic institution.

This is precisely why I hope my colleagues who attended Kenmare and were first hand witnesses to Pat's attack on Morgan (alongside Kenmare organizers) issue a clear statement as to the value of the freedom of speech and expression and the value of freedom of thought.

For now, I am saddened by the fact that an economist for whom I have nothing but respect had joined a pack pursuit of independent thought...

Saturday, October 17, 2009

Economics 17/10/2009: WalMart/IKEA Effect, Bull Markets in Stocks

Scroll for IKEA Effect discussion and Retail Sales Data below...

A superb note on the current markets from Robert Lenzner on the links between the Bull run we are experiencing and economic fundamentals is available from Forbes (here). To sum it up: that which can't go on usually doesn't.

What are the implications for Ireland?
  • Our exports are likely to suffer significant downward pressure in years to come - a combination of Obama Administration Healthcare Reform (driving down long-term returns to pharma sector and re-orienting US purchasing to more centralized and, more likely, heavily domestic-industry oriented purchasing will undermine majour pharma players - the dominant force in Irish exports) plus cyclical effects of patents expiration (Pfizer - Ireland's largest singular exporter - is facing tough times in coming up with new blockbusters as its existent ones are running out of patent protection) will act to depress future exports growth in the pharma and bio-phrama sector.
  • Our indigenous exports will remain uncompetitive for years to come as a combination of strong euro (especially if the ECB continues to move toward 'exit strategies' and higher interest rates) and the legacy of the crisis (high debt levels and severe maturity mismatch in Irish sectors) will continue to weigh on future growth.
  • Our domestic consumption will remain in doldrums for years to come under combined weight of higher taxation and stronger euro, with a resultant shift to imported substitutes (see IKEA effect below).
  • Our trading and investment block - the EEC - will remain anaemic growth partner.
  • Our internal investment will stay flat at low levels as a combination of higher investment costs (banks raising margins and engaging in wholesale capital destruction by re-drawing terms and conditions of existent loans to companies and households post-Nama) and precautionary savings (our households and corporates holding excessive cash reserves with demand-style access covenants on these holdings) will imply low returns to domestic investment, high cost of such investment all in the environment of subdued growth.
Can you see Bank of Ireland or AIB shares trading at Euro4.00-5.00 range with these prospects? I don't...

Ikea Effect: I wrote before on many occasions about the WalMart effect: give consumers better value for money (through more efficient purchasing, logistics, distribution, marketing and retailing) and they will vote for you in tens of thousands. Now we have a small glimpse at it in the form of IKEA.

Here it is - in this week's CSO data on retail sales: August retail sales down a massive 1.0% overall, after six months of shallow increases. Worse than that - core retail sales (ex-motors) down 1.8% on July breaking three months improvements pattern. Food sales were down 2.8% despite decent weather and more families staying at home instead of leaving for a vacation. But, Furniture & Lighting was up 26% - thanks to IKEA.

Few charts to illustrate trends.
So broader trends are dire. But look at what's happening in Furniture Sector (IKEA Effect):

Now, per CSO CPI data: Furniture and Furnishings, plus Carpets & Floor Covering account for 1.0812% of total Household Expenditure in 2006, Household Textiles - for additional 0.2424%, Glassware, tableware & household utensils 0.2577%, so roughly 1.6% of household spending goes to items sold by IKEA. Per CSO data, 2008 personal consumption expenditure in Ireland was €93,863bn, so roughly speaking €1,500mln of this went to goods of the types sold by IKEA. If IKEA offers average savings on Irish-domestics in the sector of some 25-40% (and my own experience suggests it is actually greater than that, but let us be conservative), the savings potential due to IKEA Effect add up to some €375-600mln or some €133 per every person in this country.

Now, IKEA has been trying to get a store into Ireland since at least 2000, which implies that an average Irish household has lost up to €4,000 in savings that could have been achieved were the IKEA (or WalMart) effect present in this economy. All due to the corporatist and politicised nature of our planning and retail regulations. Some price to pay!

Of course, these savings would have been even greater as:
  • IKEA (WalMart) effect could have had spillover effects to other sectors of Irish economy were our policymakers not engaged in actively restricting competition in retail sector;
  • IKEA (WalMart) effect would have coincided with heavier purchasing of durable goods during the boom years of 2003-2007, thus offering greater level savings on more expensive items.
But let us not count 'small change' - after all, preserving a 'small town' character of retailing (with convenience shops littering every corner of our towns and gas-station shopping outside of Dublin instead of proper multiples retailing) is worth €4,000 per family. Isn't it?

A quick note on the WalMart effect in broader terms. Ireland is aiming to get its R&D spending (public and private) contribution up to 3% of GDP or in 2009 terms - roughly €5.1bn per annum. Now, assuming WalMart-type retail efficiencies can deliver a 10-15% savings on our retail spending, the gains from the WalMart effect will mean an addition to our GDP to the tune of €9-14bn per annum. Of these, some 30% will be accruing to the Exchequer in form of various taxes, so the second order increase in GDP will be €2.7-4.2bn. Total increase in GDP will, therefore exceed €11-18bn or 6.5-10.5% of GDP. (These are back of the envelope calculations, but you can see where it is going)...

Friday, October 16, 2009

Economics 16/10/2009: FAS - rotten outcomes on top of rotten culture?

Here is an interesting illustration of how ineffective was (and is) FAS is addressing the issue of long-term unemployment.
Of course, the tricky thing is: if FAS premise to up-skill and up-tool workers to match the future needs of our labour force holds any water, then we should expect FAS to be able to have a positive effect on reducing long-term unemployment. Of course, as the graph above shows, they never managed to do this, with long-term unemployment remaining at persistently high levels relative to overall unemployment through 2007. Only an onset of rapidly rising new unemployment since the inception of labour market crisis in Q1 2008 has changed long-term unemployment share in total joblessness. As newly unemployed multiplied in numbers, the overall weight of long-term unemployment in total unemployment temporarily has fallen.

So there you go - reforming FAS must take radical forms!

Oh, and on personal note of response to Denis O'Brien's comment today about 99% of economists who did not predict this crisis and 1% who predicted it long before it happened:

Per Irish Economy blog: "RTE reports the following comments from billionaire businessman Denis O’Brien while speaking at a Dublin Chamber of Commerce: Mr O’Brien also said the country’s third level sector supported 250 academic economists whom he accused of ‘writing blogs, twittering and taking out ads to stop NAMA’. He said they generally made a nuisance of themselves - which would be fine if 99% of them had not failed to predict the economic meltdown facing the country. He said the other 1% predicted doom all the time. ‘I have a sense that all these economists need to come and work for real businesses to really understand how the economy works and see the actual stress and strain of running a business… only then will they have something to contribute,’ he said.

Point 1 for Mr O'Brien: I work for real businesses - both in this country and abroad. In fact, I also run my own business.

Point 2 for Mr O'Brien: last week I lectured Mon-Friday each day for 6 hours in TCD, Wed-Fri for additional 2 hours in UCD, and on Saturday - for 3 hours at TCD again. In between, apart from Twittering and blogging, I also wrote several press articles, worked on two research papers and had a number of business meetings. I also worked on a long-term private sector research project and advised my clients in the US.

Point 3 for Mr O'Brien: in 2004-2007 I warned repeatedly that Ireland is facing a crisis in public spending, housing markets and private sectors debt. I did so from various platforms, including his own Newstalk106 and TodayFM. In 2008 I was at the fore front of private sector economists who were pointing at the depth of developing crisis. I also made a point of always offering a potential solution to every problem I was able to identify. Not that I called everything right in my life, but Mr O'Brien's statement is a bit rich.

Point 4 for Mr O'Brien: it is precisely
  • because we are seeing real businesses being squeezed by the banks in anticipation of Nama,
  • because we are seeing people sliding into perpetual dependency on the dole,
  • because we are seeing the depth of the crisis,
  • because we are seeing the taxpayers of this country being destroyed by wrong policies,
  • because we are seeing people losing their entire retirement savings to the same ideas and policies that now back Nama,
that we are warning about the risks that Nama and other Government policies have.

Mr O'Brien might not see it this way - and it is his right to disagree - but throwing about silly statements in an attempt to ingratiate oneself with those in power is a strange position for a successful entrepreneur and businessman like Mr O'Brien.

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."

Wednesday, October 14, 2009

Economics 15/10/2009: NAMA Business Plan Falls Flat

Updated 09:01

Note: Karl Whelan's post on Nama Business Plan is available here.

So let us start with Nama Business Plan published tonight: the main claim is that Nama is expected to generate a net present value return of €4.8bn by 2020.

I beg to differ. Here is why in two steps:

Step 1:

This €77 billion is made up of approximately €49 billion land and development loans (€28 billion and €21 billion respectively) and approximately €28 billion in associated loans.” Of the latter, €14.2bn is in derivative instruments.

Now, land values have fallen by some 70% plus, with some land now valued at a 90% discount. What the recovery rate on these loans? Assume 30-35%, to the total loss of €18-20bn.

Development loans currently carry default and roll-up rates of well in excess of 40%. Suppose Nama buys an average portfolio of these and that the default rate rises to 1/3 of all stressed development loans. Expected loss here is therefore around €7-9bn.

Associated loans include second recourse and non-recourse loans and cross-collateralized loans. They have lower seniority on underlying assets. And this includes (50%) derivatives – instruments that actually cannot be priced directly without requisite information that has not been supplied by DofF. So suppose the default rate here is the average of the above two rates, or ca 50%, to the total loss on this part of the book of €14bn.

Add this up: total expected loss on Nama loans book value is €39-43bn before we factor in roll ups of interest. Day one of operation, Nama will be holding the portfolio of loans with expected value of €77-€41=€36bn against the liability of €54bn, which implies it will be in the red to the tune of €18bn.

Make another clarifying assumption. Assume that for the last segment of the book – the associated loans – derivative instruments are similar to the average market derivative contracts as stipulated in Table 3 of the BP. This pushes losses on this part of the book up by additional 25-35% of the derivatives segment value. The total loss Nama will incur on day one of its operations will then be a staggering €21.7-23.1bn.

The estimated aggregate average loan to value (LTV) rate for these loans is approximately 77% i.e. the value of the real estate collateral at the time the loans were originated was €88 billion. The loans were made over a number of years and not all were made at the peak of the market.”

Suppose this is true, although I have no confidence that this number is real. Suppose average vintage of the loans is 2005. Land is currently at below 1999 levels in pricing. Development projects are around 2001-2002 pricing and completed property is around 2004. Assuming we are at the bottom, average LTV on these loans today is around:
This is LTV ratio on Nama purchase as of today of 98.2%. Not 77%, but 98.2%.

If average vintage of Nama loans shifts to 2006 (a more likely scenario, as Nama will not be buying an ‘average bank loan, but a non-performing loans portfolio with so-called ‘performing’ loans to be mixed in coming from stressed loans side of the balance sheet), then the actual today’s LTV shifts to:
This is LTV ratio on Nama purchase as of today of 112%. Not 77%, but 112%.

Incidentally, Nama ‘Business Plan’ contains no sensitivity analysis of this sort or of any sorts – neither for expected inflation, nor for spreads on bonds, nor for cost of administration, or for any other assumptions.

Step 2: redoing Nama balancesheet:

Table 5 clearly states that Nama expects life-time default rates for all loans and derivative instruments transferred to be 19.35% of the book value of loans at origination! Business Plan admits (page 9) that in the last year alone the banks took a charge of €7.3bn on the book – just under 10%. Thus, DofF expects 2009-2011 default rate to be only 10% more. This is for a book that overall contains 40% non-performing loans already! It is simply a case of amazing degree of optimism.

Let us do the math for alternative scenario. Suppose the default rate overall will be 33%, in which case without challenging any other DofF assumptions in Table 5, the net gain of €4.8bn turns into a loss in present value terms of €10.2bn. Just like that!

Now, let us challenge the assumption on Nama yields. DoF data is shown in the Table below. The second table changes yield assumptions and retains my default assumption above:
Now, per table 2 above, combined assumptions of more realistic default rate and more realistic yields (consistent with current yield, adjusting for default rate expected through 2011), and recognizing that derivative instruments yields are unlikely to be achieved at all, bottom line Nama is now expected to yield an €8.6bn loss in present value terms.

Shall we move on? Assuming slightly steeper curve on the cost of bonds financing, table below shows that expected Nama losses can reach €11.5bn in present value terms (Table 3).

One last thing left to do. Recall that per Nama own Business Plan admission, 40% of loans are currently producing a yield. This implies that 60% are non-performing. If yield curve were to rise over time as Nama assumes, these loans are not going to start repayments at any time in the future. So suppose the default rate assumption goes to 45%. Table below shows the end game:
A loss of €19.1bn in real terms!

And this is before we compute the opportunity costs of this money.

Conclusion: DoF estimates for Nama make absolutely no sense. The best scenario I get is a loss of €10.2bn. The worst one yield losses of €19.1bn.

Note: the above do not include the cost of managing the Nama loans by the banks. These ordinarily range around 0.5% of the total loan value per annum. Suppose the banks will be able to pass these costs on their paying customers (you and me). The net effect will be an annual added cost to businesses and paying customers of €270mln.

Note: All Nama flows are targeted for 2013, which in effect saddles future Government with the entire obligation under Nama. A rescue package, then, for banks, developers (with a repayment holiday until 2013) and... FF...