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It looks like the cause of your problem is that you have specified an invalid (i.e. non-invertable) level-2 co-variance matrix. This means that when MLwiN attempts to simulate a new response based on this if fails, instead setting the whole co-variance to zero which later on causes the error that you are seeing. The matrix that you are entering is:
0.08
0.25 0.02
If you change this to something valid then I believe that the simulation should run correctly.