Putting manners on the Nama numbers

Sat, Aug 15, 2009, 01:00

We all understand that there’s a financial crisis, but if we don’t know our billions from our trillions then how can we truly comprehend the vast sums involved, asks Simon Carswell, Finance Correspondent

WITH TENS OF billions of euro being spent on propping up the country’s banks, it’s easy for the true cost of the Government’s financial rescue to be lost on the average person. Just consider the debts owing by the Zoe group of property companies controlled by developer Liam Carroll, one of the biggest developers in the country and the man expected to be the largest customer heading into the Government’s “bad bank”, Nama. The Zoe group, just one of three groups in his business empire, owes eight banks €1.2 billion – that’s €1,200 million.

And this figure doesn’t account for the overall indebtedness of Carroll’s wider property empire. The total liabilities of his business are estimated to be in the region of €2.8 billion – that’s €2,800 million – making him one of the most, if not the most, heavily indebted developer in the country.

To put this in context, figures released by the Irish Banking Federation on Wednesday, the same day that two of Carroll’s companies were placed in provisional liquidation by the High Court, showed that new mortgages totalled €4.2 billion in the first half of this year.

The debts of another developer startled many when they emerged publicly last month. John Fleming, who is based in Bandon, west Co Cork, concentrated on the property market in Munster before expanding into Dublin at the tail-end of the property boom.Fleming sought the protection of the High Court, resisting a repayment demand on a loan owing to the Dutch-owned lender, ACCBank, whose aggressive actions are forcing developers into the Four Courts.

Evidence was put to the court that ACC’s unpaid loans of €21.5 million amounted to less than 2 per cent of the overall indebtedness of Fleming’s group. This would put his debts at more than €1,000 million, or €1 billion. Few, even in the property business, would have believed that his debts were so considerable.

Again, it may be difficult for the average person to understand the scale of the liabilities. Use of the term “billion” may not convey the real magnitude of the staggering debts that are emerging among the country’s developers.

Throughout most of the 19th and 20th centuries, the term “billion” was taken to mean one million millions on this side of the Atlantic, but since the mid-1970s the American meaning of one billion – 1,000 million – has come to be accepted as the international standard.

However, even describing one billion as 1,000 million can fail to communicate the full extent of the debt.

LINDA BILMES, a lecturer at Harvard’s Kennedy School of Government in the US, and Nobel economics laureate Joseph Stiglitz wrote in a 2006 research paper that the Iraq war, then three years old, could end up costing the US as much as $2 trillion, which was about €1.6 trillion at the time.

However, while trying to explain the report’s findings Bilmes found that the average person couldn’t comprehend the full cost of the war, as they had difficulty understanding how much one trillion dollars was actually worth. To help, she used a simple example; she told her students that one billion seconds is the same as 32 years and one trillion seconds is the same as 300 centuries.

Dr Ken McKenzie, a social psychologist based in University College Dublin, says that most people’s command of algebra is quite weak and that many people would not know how many million are in one billion. He says that “trying to put manners on abstract numbers” by showing national debt as a figure per head of population, as an example, enables people to digest the figures better and to understand the full extent of that indebtedness.

He cites studies by German psychologist Gerd Gigerenzer, who found that even people with a standard level of education have only a weak understanding of numbers and a tenuous grasp of probability and risks.

McKenzie says that people need “meaning-making” to understand intangible concepts such as impossibly large sums of money. This is why expressing national debt as a sum per person is a more powerful tool in helping people to comprehend its scale – they instantaneously “get it”, he says.

“The reason they get it is called a ‘frame effect’,” he says. “People are constantly exposed to dealing with reasonably large sums of debt per person in the form of overdrafts and credit-card bills. As we are used to this line of reasoning, we can instantaneously apply this ‘frame’ to understand national debt, for example, when expressed as X thousand per man, woman and child.”

The National Treasury Management Agency, which manages the Government’s borrowings, lists the national debt at €67,009 million (or €67.009 billion). Simplfiying this figure, it amounts to €15,804 for every man, woman and child in the country, or €45,824 per household.

TAKE THEdevelopment loans to be acquired by the State’s “bad bank”, Nama. They are currently valued at €90 billion on the books of the financial institutions, but will be bought at an as-yet- undecided discount by the Government.

For a sum equal to the loans’ current value, the State could run our health service for almost six and a half years or build 231 Luas lines based on the original cost of a single tram line.

The Government has so far invested €10.8 billion in Bank of Ireland, Allied Irish Banks and the nationalised Anglo Irish Bank. The same money would pay for more than 400 national breast cancer screening programmes. For an equivalent sum, the Government could employ 294,000 people on the average industrial wage for a year or run Our Lady’s Children Hospital in Crumlin for 79 years based on its current annual budget.

This puts the heavy cost of fixing the banks – and the associated risks – in sharp perspective.