Archive for November 1st, 2011

There has been no press statement forthcoming from the three parties who together are responsible for the €3.6bn “accounting error” reported today, which means that our national debt will be restated and will be €3.6bn less than previously understood. The story of the error was first reported this morning by Ireland’s TV3 ; the initial details were sketchy but this is what we know so far:

(1) The error relates to an advance in 2010 by the National Treasury Management Agency (NTMA), a State agency which reports to the Department of Finance

(2) The advance was made to the Housing Finance Agency (HFA) a State company which reports to the Department of Finance. The HFA’s auditors are KPMG and Ian d’Alton is the CEO; there doesn’t appear to be a designated finance director shown in the 2010 Annual Report

(3) The “accounting error” was discovered on Friday last, 28th October 2011.

The national debt was reported by the NTMA to be €114.7bn at the end of September 2011. This €3.6bn reduction will therefore reduce our national debt by 3.1%. Our Gross Domestic Product in 2010 was €155.992bn so the reduction of €3.6bn represents 2.3% of GDP.  Our official peak debt:GDP in 2013 should fall from 118% to 116%. Wow!

It is not possible to see the advance by the NTMA to the NFA separated out in the 2010 report for the NTMA but the NFA’s 2010 annual report does say the following “section 17 of the Housing (Miscellaneous Provisions) Act, 2002 and section 19 of the Planning and Development (Amendment) Act, 2002 gives the Agency the power to request the National Treasury Management Agency (NT MA) to  undertake borrowing and debt management on the Agency’s behalf. Under the terms of a formal agreement between the NTMA and the Agency, the Agency decides the general policy within which funding carried out by the NTMA together with the appropriate debt instruments, takes place. The Agency acts in close consultation with, and on the advice of, the NTMA in regard to its eurocommercial paper [ECP] and Guaranteed Notes [GN ] programmes. The NTMA had purchased €3.8 billion in GN s at 31 December 2010 (2009: €212k). Funding received through the ECP programme accounted for only €301 million of total Agency funding (2009: €4,084 million).”

In fact there is an error in the above, the GNs at 31 December 2009 were €212m, not €212k (see note 11 to the 2010 accounts on page 47 of the 2010 annual report) . The new lending by the NTMA to the NFA in 2010 was €3.620bn. So it looks like the following will have been the transactions:

(1) The NTMA sells Guaranteed Notes (GNs) to the market and gets €3.6bn in cash.

(2) The cash is transferred from the NTMA to the NFA

(3) The cash is received by the NFA and the debt to the NTMA is recognized.

So how did the mistake come about?

We don’t yet know, and the reporting so far is goobledygook (that’s an accountant’s assessment by the way!). Obviously the NTMA will have recorded the issuance of the Guaranteed Notes as part of the national debt. But it is not clear what happened next, but it looks as if the NFA classified the advance from the NTMA as part of the national debt or someone at the Department of Finance misclassified the advance.

We can but hope for a full explanation from Minister for Finance, Michael Noonan, of what appears to be a royal cock-up. The €228,466 a year Secretary General at the Department of Finance, Kevin Cardiff who took up the position in January 2010, will be moving to a new 6-year contract at the European Court of Auditors in February 2012.

UPDATE: 1st November, 2011. A spokesman for the NTMA has issued the following written statement this afternoon “The Department of Finance is responsible for the calculation of General Government Debt.  The NTMA raised the issue (of potential double counting) with the Department of Finance on a number of occasions from as far back as Autumn 2010.”

UPDATE: 3rd November, 2011. There will be an emergency hearing this morning of the Oireachtas Committee of Public Accounts from 10.30am when the Secretary General at the Department of Finance, Kevin Cardiff as well as officials from the NTMA and CSO will be quizzed on the error.  There will be live video streaming from the hearing on the Oireachtas website here (it’s in Committee Room 1). There were suggestions in the Dail yesterday that the NTMA was not completely blameless as it had produced an annual report for 2010 in which it alluded to a national debt figure which it now claims it had questioned.

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The Nationwide Building Society has this morning published its UK House Price data for October 2011. The Nationwide tends to be the first of the two UK building societies (the other being the Halifax) to produce house price data each month, it is one of the information sources referenced by NAMA’s Long Term Economic Value Regulation and is the source for the UK Residential key market data at the top of this page.

The Nationwide says that the average price of a UK home is now GBP £165,650 (compared with GBP £166,256 in September 2011 and GBP £162,764 at the end of November 2009 – 30th November, 2009 is the Valuation date chosen by NAMA by reference to which it values the Current Market Values of assets underpinning NAMA loans). Prices in the UK are now 11.0% off the peak of GBP £186,044 in October 2007. Interestingly the average house price at the end of August 2011 being GBP £165,650 (or €192,883 at GBP 1 = EUR 1.1644) is 9.8% above the €175,165 implied by applying the CSO September 2011 index to the PTSB/ESRI peak prices.

With the latest release from Nationwide, UK house prices have risen by 1.8% since 30th November, 2009, the date chosen by NAMA pursuant to the section 73 of the NAMA Act by reference to which Current Market Values of assets are valued. The NWL Index is now at 833 (because only an estimated 20% of NAMA property in the UK is residential and only 29% of NAMA’s property overall is in the UK, small changes in UK residential have a negligible impact on the index) meaning that average prices of NAMA property must increase by a weighted average of 20.1% for NAMA to breakeven on a gross basis.

The short-term outlook for UKresidential, like the UKeconomy as a whole, remains bumpy. It seems as if UKinterest rates will be held at historic lows for some time to come – the base rate which has been at 0.5% since February, 2009. Inflation remains above 4% per annum and is projected to finish 2011 at 4-5%. It’s worth pointing out that CPI inflation in the UK has increased by 14.8% (105.3 to 120.9) since October 2007 – the peak in house prices –  no doubt as a result in part to the GBP 295bn of quantitative easing applied in the UK.  Unemployment in the UK remains elevated (for it) at 7.9% – paradise compared with the 14.3% unemployment here.

Mortgage lending in the UK picked up in July 2011, but a report by the Land Registry indicated a declining pattern of transactions over the past year. On a regional basis, practically all regions of the UK have seen a decline in prices in the past year, with the exception of London. Personally I am sceptical of the much-vaunted Olympics effect on London house prices – the city has a large population which is increasing with a lot of new money coming on the market and housing supply is constrained. And remember the UK has had 4%+ inflation for most of the past year, so real declines have been more marked than the nominal headlines.

So I would have said the outlook for London seems stable but that most of the rest of the UK has a choppy short term future.

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