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."


Anonymous said...

So, is this the cost of giving developers a holiday on interest?

And if so, how do we know that will happen?

patrick1978 said...

Thanks Constanstin for your honest opinions on VietNAMA. I am sick of the brainwashing from the Department of spin and finance. Brian Lenihan telling us we'll make a "profit" is a joke. Brian Lenihan should try his hand at comedy instead of messing up the already broken and doomed financial system.

Greg said...


I found it easier to understand this way.

In the first three years of NAMA operation the “Budget” (Table 7) allows for Interest Income (Accruals Basis) in €Bn.

2010 €2.9
2011 €3.3
2012 €3.7

And Interest Cash Flow (Table 5) of

2010 €1.3
2011 €1.6
2012 €1.6

NAMA intends “rolling-up” interest of €4.9 billion in its first three years of operation.

I am however taking the “already” rolled–up of €9Bn as having been capitalised.

By the start of 2013 €14Bn of interest will have been accrued.

It’s astounding.

Greg said...


One other thing, which I have noted on irisheconomy.

The €5Bn to €10Bn of “finishing out” money is not included on the Cash Flow projection.

When I queried it Karl Whelan rightly pointed out that on Page 11,

“The projections exclude cash flows associated with NAMA funding of project completions as any net interest income earned by NAMA is likely to be marginal”

This means that €5 to €10 is being provided to the developers at virtually no margin. No risk premium.

It’s a banker/bond/developer bailout.

Anonymous said...

It is completely obvious that these government estimates were written in sand. The DoF has repeatedly shown itself incompetent of calculating its own budget despite the wealth of confidential information at its disposal. Analysis such as this blog and other places sometimes seem to make the assumption that policy is made in a logical fashion. The reality is that the driving force behind these decisions (or non decisions) is not economic logic. Sadly dig a little under the skin and you realize that Ireland is more akin to a tribal African state rather than a modern European nation in matters of economics and planning. The boom years hid that reality. So all this high-end analysis is somehow at odds with how the country works. Reading these blogs etc. gives me knowledge, but leaves me furious and feeling impotent about the future of our country. Particularly angry that even when the faces change, the policies remains unchanged. There is little choice other than to do a James Joyce (revered by the present day Irish!) and feck the gombeens.

Paul MacDonnell said...

@Anonymous. I don't think Dr. G.'s assuming policy is being made rationally but he is using rational tools to analyse it. In so doing it exposes the truth that you point out. However unreason is not a tool to be used when confronting unreason. The only tool is reason.