Economics 22/8/10: Fundamentals of investing in IRL Inc - II

This is the second post in the series of four that presents fundamentals comparatives between Ireland, Switzerland and Luxembourg. Post I (here) covered analysis of current account dynamics. The present post will deal with General Government balance.

Now, let's check IRL's sovereign solvency position. Chart 5 illustrates:

Chart 5:

Again, if you are an investor hoping to get repaid on your bonds, you wouldn’t really go for Ireland as a place to park your money. Except during 1996-2001 and 2003-2007. But then, get out as fast as you can in 2007. All in, Ireland Inc hasn't paid its bills since 2007.

Let's see if the Government has been running operations consistent with long term attractiveness to sovereign investors. To do so, suppose we invested in the bonds written against General Government balances. Since timing matters, let us take two scenarios: investing €1.00 in 1980 and investing €1.00 in 1995, holding to 2010 or 2011.

So cumulative returns on countries sovereign balances from 1980 are (Chart 6):

• 2010: Ireland=28.5%, Switzerland=32.2%, Lux=43.3%. Ireland gap to best performer = -14.8%
  
• 2011: Ireland=25.4%, Switzerland=31.9%, Lux=41.1%. Ireland gap to best performer = -15.7%
• 2010-2011 gap deterioration for Ireland = -0.9%
  

Chart 6:

Chart 7 shows cumulative returns from 1995 are:

• 2010: Ireland=-12.2%, Switzerland=-1.1%, Lux=-3.85%. Ireland gap to best performer=-11.1%
• 2011: Ireland=-11.1%, Switzerland=-0.9%, Lux=-5.1%. Ireland gap to best performer=-10.2%
• 2010-2011 gap improvement for Ireland = +0.9%
  

Chart 7:

So a portfolio of 50:50 split between 1980 investment and 1995 investment written against Irish Governments' fiscal positions since 1980 would have lost to investor 12.95% by 2010 and 2011, compared to a similar allocation into other two countries.