Eurobonds: Wrong solution for legal, political, and economic reasons

So argues Daniel Gros in this VOXEU article.

63 replies on “Eurobonds: Wrong solution for legal, political, and economic reasons”

The differences in national political systems and their quality of governance are so large that any political union that might be created on paper would not work in practice.

Giulio Tremonti, Italian finance minister, recently repeated his call for the introduction of such bonds, saying, “We wouldn’t be where we are now if we had had eurobonds.”

It’s an interesting comment from the top official of a country that could only manage average annual growth of 1% over the past decade. In the context of the latest crackdown on tax evasion, in recent weeks a court deposition has disclosed that Tremonti paid a former aide €1,000 in cash weekly, for the rent of an apartment in Rome.

Daniel Gros is correct to suggest that investors would still pay attention to debt levels and governance standards in individuals countries.

We can see from the lack of enthusiasm in Ireland, that the process of closer fiscal union will be a long one.

Sarkozy made an appropriate point last week that the relevance of eurobonds would be at then end of the process not before it begins.

Daniel Gros is certainly right to note the large differences in ‘Governance’ – maybe Ireland was not worth including in his graphs …. begs the question of what has changed in Irish Governance, broadly defined, over past four years or so – or even what has been opened up to change ….. look at the board of BoI, and all those other untouchables …!!

This focus on EuroBonds as simply a solution to a crisis is too narrow – imho they would also be a powerful geopolitical tool in the neu_troika of EU, US, & China …..

Gros refers to Social Democratic support – Der Spiegel yesterday worth a read as well

Enderlein (in the Eurobond corner, and adviser to Social Democrats) VS Sinn (in his own usual little_deutschelander corner where he sits well with the euro-skeptic little_englanders, finlanders, irelanders etc ) ….,1518,781702,00.html#ref=nlint

@Michael Hennigan

Wow! Finding an ‘appropriate point’ from le petit general is quite a research achievement.

If you cannot have a eurobond because of disparate financial performance and governance why do you have a euro?

Readers might be interested to see how Ireland scores on the World Bank Governance Indicators cited by Gross.
(These are available at:
Here the 2009 values for Ireland of the three indicators used by Gross for Ireland, with comparative value for Italy, and the ‘Core Eurozone’:

Government Effectiveness:
Core EZ 1.66
Italy 0.52
Ireland 1.30

Rule of Law:
Core EZ 1.68
Italy 0.39
Ireland 1.71

Control of Corruption:
Core EZ 1.80
Italy 0.05
Ireland 1.72

For what they are worth, these indicators suggest that Ireland is well up to the Core EZ average, with lots of clear blue water between us and Italy, for example.

If you understand what is at stake with current debt contagion and the euro project, you’d appreciate a policy framework to overcome current fiscal and monetary policy constraints will test not only the political will of the core centre….but the survival of Euro!

Political ramifictions currently discussed by CDU/CSU/FDP leads one to a false conclusion – principally because Germany will be major loser should euro implode (see Wyplosz, ‘They still don’t get it” Vox (22 Aug 2011).

Eurobonds is a solution – to calm the bond market.

Long term, Germany/France/Netherlands/Finnland/Austria have to come to grips with (coming) fiscal union and lose of soverign parliamentary control of how centre eventually decides framework of fiscal policy – going forward.

Euro project and Single Market Act, in fact, transferred printing of Euro money to ECB. This of course was not to GCBs satisfaction – recent resignation of Weber and appointment of Wiedmann (Merkel’s economic advisor during Greece bailout crisis) makes absolutely clear that GCB is opposed to Trichet’s entry into fiscal policy matters (not ECBs domain!).

IMO this policy crisis is long overdue at the centre. Borosso has been the weakest intellectual link in this crisis; and, consequently he reduced the role of (non-political) Commission to influence the policy directive to the benefit of Berlin and Paris.

Now politicians in CDU are coming around to understand the core fiscal policy issue and the inevitable political confrontation on how and under what conditions to transfer fiscal poicy to the Commission.

Just now DLF radio is reporting German President Wolf has now officially attacked Trichet and ECB for buying Spanish/Italian sovereign bonds.

And that was under the old regime of Biffo the Balladeer. Surely, we must have improved since then!!!!!

@ Brendan Walsh

ta for those figures, was just going to comment on why Gros had left us out of the mix when he referred to them, possibly because it would take away from his argument somewhat. As you note, on a lot of metrics like those, eurobonds would actually make sense for us for at least some of our funding, to make up for our deleveraging financial system and small/low liquidity market.

Choosing Bongabongaland for comparison is a bit obvious. How about comparing us with Germany. We have to set our sights higher.


(why not just check yourself, Brendan Walsh gave the link?)

The german scores are 1.48, 1.63 and 1.7 (avg 1.60), which are very close to Irelands (avg 1.58).


Bongabongaland could be taken as a reference to France, since President El Hadji Omar Bongo of Gabon was a good friend of President Nicolas Sarkozy until his death in 2009.
The phrase Bunga Bunga, on the other hand, has been associated with President Silvio Berlusconi, allegedly taught to him by his (former) friend Muammar al-Gaddafi.

@Ronnie O’Toole
Something very odd about those statistics. We are up there with the Germans. Churchill comes to mind.

CNBC Reporting 2 year Greek now at 43%…. looks like the ECB have left them to drown.

@ Brendan Walsh

This is akin to reading a story about a situation that one is more familiar than the foreign journalist who has got the wrong end of the stick.

Conflict of interest remains a strange concept in Ireland; we are better than Italy and a tribunal report on a former taoiseach is pending.

The planning tribunal is kind of confusing as to its purpose — the public contract lawyers became multimillionaires sometimes investigating payments less than what they were paid for a day’s work.

Interesting translation on that link…

My name is bond, eurobond!

23.08.2011, 11:33 clock
The markets want it, the debt countries demand it, but Angela Merkel tries to prevent them with all power. Because the Community loans have the license to killing: Seven arguments against eurobonds.

Sounds like James all right.

@ All

What is notable about the contributions of Sinn and Gros is that they never let the facts get in the way of any point that they happen to be making. For example, Gros states as a matter of fact that the creation of E-bonds would be contrary to the treaties, notably Article 125 in relation to the no bailout rule. But this has never been tested before the European Court of Justice, the appropriate instance for deciding the matter. He also conveniently omits, as others have pointed out, the governance statistics in relation to Ireland which would largely undermine an already dubious “moral superiority” argument.

An example in respect of Sinn is the following quotation from Der Spiegel article.

“But, first, the voices of all the inhabitants of EU countries need to have equal weight. “One man, one vote,” as the Americans say. Germany is underrepresented in practically all EU bodies”.

Either he is unaware of, or chooses to ignore, the fact that the number of representatives per country in the European Parliament is decided on the basis of a system of “degressive proportionality” (Article 14.2 TEU) which is the same in terms of principle as that applied to the division of seats among the laender in the Bundesrat. What is he talking about?

He is undoubtedly taking his cue from the idiosyncratic judgement of the German constitutional court which advanced, with an equal level of blinkered analysis, the view that the European Parliament lacked democratic legitimacy because it was not based on one man one vote. But such a view denies the existence of the Community method which constitutes the foundation of a Union based on a sui generis system of division of powers i.e. a system of checks and balances which is the hallmark of all truly democratic systems.

The court is due to deliver its next judgment in the matter on 7 September. In all likelihood, it will retreat from directly disputing the powers of interpretation given by the member states collectively – with a popular mandate of the peoples of Europe in nearly all instances of enlargement of the EU – to the European Court of Justice. But it will probably tie the hands of the executive of the federal government in a manner which may give rise to further major difficulties.

@ All

Former Chancellor Kohl, who still carries enormous political weight in Germany (which is more than can be said of its current President), has now joined the debate in a manner in which he has not hitherto done. Although he does not criticise directly Merkel, his protogé and successor as head of the CDU – and who had a major hand in his deposition – his overall assessment of the conduct of Germany’s European, and general foreign policy, from Schroeder onwards is quite devastating.

I wonder why if Ireland had such great governance and control of corruption its finances are in as parlous a state as any – save Greece. As Edgar pointed out, small sample sizes and large confidence intervals may render the findings useless. Those inclined to confirmation bias will however not let it stop them.

That is an excellent analysis by Gros. Though Gros leaves to one side issues of overall financial stability, which to my mind could legitimately require something like Eurobonds. If the Germans don’t address the monetary and banking problems, they’ll find their options will narrow. and as others have pointed out, Germany is getting quite angry:

All eyes on them for the next while.


Ulrich Beck in today’s Der Spiegel

‘Does the Hegelian idea that reason ultimately prevails throughout history, despite many diversions, still apply? Or is Carl Schmitt’s belief that hostility among nations must invariably prevail more fitting to conditions in the world today?’

Think I’ll take Hegel with, for the first time ever (and probably the last), a tiny dash of Schmitt.,1518,782148,00.html

@ Desmon Brennan

To quote Wulff;

“They [government leaders] have to stop reacting frantically to every fall on the stock markets. They mustn’t allow themselves to be led around the nose by banks, rating agencies or the erratic media,” he said.

“This strikes at the very core of our democracies. Decisions have to be made in parliament in a liberal democracy. That is where legitimacy lies”.

If Wulff really believes this, there is no room any longer for German participation in the institutions of the European Union – one of which happens to be the ECB – and his extraordinary attack, as a head of state, on one of them makes some kind of sense.

Luckily, Wulff does not have the stature to greatly influence events and is included by Der Spiegel among the “clueless” who would be better off leaving the problems to those who have some expertise in the matter.

As to taking on the markets, Merkel clearly believes this is feasible. But, as a famous economist once remarked, “markets can stay irrational much longer than you can stay solvent”. The other iron lady, Margaret Thatcher, never made that mistake being known to have remarked “you can’t buck the markets”.

@Brendan Walsh

We’re way ahead of Italy?

Berlusconi may be a crooked stupid nut, but he didn’t guarantee Italian bank debt.

The is a bit of ‘apart from that Mrs. Lincoln, how did you enjoy the play?’ about any praise of Irish governance since the guarantee. We’re a joke. Pseudo-scientific ratings with 2 decimals points can’t hide that obvious fact.


“But, as a famous economist once remarked, “markets can stay irrational much longer than you can stay solvent”. The other iron lady, Margaret Thatcher, never made that mistake being known to have remarked “you can’t buck the markets”.”

Would you have the sources for those quotes? I can only see them as attributed.

Methinks Sarah Carey musta had a taste o that neu Carl Schmitt flavoured essence … Context in Blue.

@ Gavin

I think it was Keynes. But its essentially the traders motto these days as well, ie cut your losses.

Actually, if we take all 6 measures in the World Bank governance report, and not just the 3 cited by Gros, Ireland comes ahead of Germany, as well as UK, France, Belgium and the Club Med countries. From a quick calculation, Ireland’s score, averaged over the 6 measures, was the 7th highest in the EU27, being bettered only by Austria, Denmark, Finland, Luxembourg, Netherlands and Sweden. The scores of some of the others:

Ireland 1.452
Germany 1.422
U. Kingdom 1.312
Belgium 1.288
France 1.213
U. States 1.1635
Portugal 1.060
Spain 0.876
Italy 0.572
Greece 0.498

Add in the report earlier this week (link below), which showed that Ireland was the most efficient country in the world at reducing mortality per euro spent on health care, not to mention the migration figures debacle, and I think that, when the history of Irieland’s governance during the recent era is written in a decade or so’s time, it will turn out to be totally different to the fantasy version promulgated by the Dublin 4 media at the time of the February election.

Slowly, the truth is percolating to the outside world, even if this site turns out to be the last to grasp it. From today’s Irish Times:

“Irish bonds are delivering the best returns in the world as investors bet the Republic is the most likely of the euro area’s bailed out countries to grow itself out of trouble.”

Have I not said that repeatedly for the past year? Have I not been sneered at for a year for saying that, yielding double-digit interest rates and set against 1% inflation, Irish bonds were a great investment, especcially when compared with British bonds yielding 2% interest rates and set against 5% inflation? All those on this site, who bought UK bonds since 2007, and who have seen their returns fall far below UK inflation and sterling depreciation, must be feeling very sick by now.

On the politics of changing EU Treaties to allow for “joint and several” €urobond liabilities, Daniel Gros confused the rejection by French and Dutch voters of the Constitution for Europe in referenda in 2005 with the Lisbon Treaty.

(The fate of the Lisbon Treaty, which was rejected when put to a referendum in France and the Netherlands, should be a warning.)

The Lisbon Treaty was the result of this rejection by the electorates in two founding members of the European project. Although the Luxemburg and Spanish voters has approved the same Constitution in referenda, the French and Dutch were not asked to vote again on the issue.

We, in the Republic of Ireland, were the only voters of the EU27 who had to approve the Lisbon Treaty in a referendum – which we did on the repeat.

Since the Lisbon Treaty was signed in December 2007, it is clear sentiment towards the European project in many EU Member States has turned negative.

This may be because the elites has pushed too far ahead. I may also be that over the years, the European project has been hallowed out to become more intergovernmental, due to a lack of direct experience/memory of the conditions which gave give to the European project eg. two world wars in 25 years, the Depression, doubts about the capacity of Europe to feed itself.


As a regular reader I believe you were advocating purchasing Irish Bonds when yields were lower than they are now – in which case your advice would be showing a negative return.

Conversely, anyone who invested in UK government Bonds in 2007 would be showing a positive return around now – how about you do the exact calculations of return of Irish Governement Bonds bought 1 year, 2 years, 3 years, 4 years and 5 years ago vs return on UK bonds over same periods.

I wont hold my breath as it appears you just don`t understand how to do it.

Think I’ll take the day off! Ireland bowling first – Clontarf & Sky Sports 1.

The Franco-Germans can neither bat nor bowl – little wonder Europe is in the state it’s in. Time to change direction 180 degrees – bit like Morgan captaining England – time for that reverse take-over …


In fairness you did and you were swimming against the tide. I hope you followed up on your own advice and booked a profit.

I would hope that many of your critics did not follow their own judgement and short Irish gilts at double digit yields

Still we are not out of the woods yet by any means. We still have to tackle all the dead wood planted by the “good governments” of the first decade of the 21st century.

Limbering up – had to toss out that .001 ppm of schmitt – now to enjoy the day (-;


Took some time out of my busy work schedule to do some quick calcs for you:

Euro to Euro Returns:

UK Bonds:

over past 1 Year = -1.5%
over past 2 yeas = +6%

Irish Bonds

over past 1 Year = -17%
over past 2 yeas = -8%

You can do the 3/4/5 year returns if you think it will help your cause

(above returns based on investment in irish 10 year bonds vs UK all gilt index)

What happens now?

“Meanwhile, Finance Minister Evangelos Venizelos admitted to government deputies yesterday that Athens will probably ask for new negotiations with its creditors in order to revise this year’s target for the reduction of the budget deficit.

He also confirmed that the government is reviewing the entire privatization program owing to the fact that stocks have been sinking on the local bourse and the effect this has on the value of state companies listed on the Athens Exchange.”

It seems the media have grown weary of the Greek tragedy. Not a mention anywhere other than the above which was buried in an article on another topic.

@ Eoin Bond

Thanks for that. I got it was Keynes – I was wondering if it was apocryphal.

@ David O’Donnell

The French were big into their cricket – sadly play was disrupted.

“The Marylebone Cricket Club (MCC) were due to make the first ever international cricket tour of France, in 1789, however this was cancelled due to the French Revolution. This match was finally played in 1989, as part of the bicentennial celebrations of the revolution, with France beating the MCC by 7 wickets.” – Wikipedia

@ Actuary

the currency gain over a 4 year period is very substantial for EUR vs GBP. You seem to have ignored that.

“the currency gain over a 4 year period is very substantial for EUR vs GBP. You seem to have ignored that.”

Separate investment really, could gain on the currency without having to lose on the bonds.

@Gavin, re “markets can stay irrational much longer than you can stay solvent”

I believe all efforts to trace that to Keynes have failed, as is the case with many remarks attributed to him.

@ DE

“Separate investment really”

well no, its not. Yes you could do it seperately, but if the proposition is UK Gilts vs Irish bonds, which it is, there is a fundamental currency risk. Its not a ‘maybe’. Its embedded in the investment, whether you like it or not, as with any Irish vs UK asset proposition. Overall, the currency gain has outweighed the credit loss, but a lot of this depends on just what you’re buying (deposits, short dated, long dated bonds) and when you did it.

As i said before, JTO is a great rates trader, a brilliant currency trader, but a dodgy credit trader. On the credit aspect, he may end up being proven correct, and if he’d suggested slightly shorter dated Irish govvies, the overall proposed gain would be even bigger.

@ Bond, Eoin Bond

Not in the figures I quoted (1 and 2 year returns which I have taken account of currency movements)

Agree that currency movements over longer terms will partially (at least) offset losses – though that is only for investments in 2007. For anytime after that I am sure that UK Bonds will outperform Irish Bonds on Euro to Euro basis (and possible for 2007 though I havent checked – its close)

I doubt JTO was advising people to buy Irish bonds in 2007 though – I am sure all his recommendations came after 2008 when UK bonds have proven to be a better investment (even after the stellar returns of the past 3 months).

….and obviously it depends on exact bond bought.

I am presuming we are taking the oft quoted 10 year bonds. Obviously as term approaches zero currency movements make much more impact.

@ Gavin Kostick

FYI (The comment about economists aspiring to the reputation of dentists is particularly apt).

The other quotation is a well known one often attributed to Margaret Thatcher.

Derek Scally has very good coverage of the lengthy and clearly carefully weighed contribution by Kohl which is not actually published until tomorrow. The website of the institute concerned apparently was so overloaded that it crashed, a measure of the interest in it.

The most pertinent extract from the Derek Scally coverage is as follows:

“What Europe really needs in this crisis is to knuckle down and create a package of far-sighted, clever and non-ideological measures. It will be more expensive than without the mistakes but we have no choice if we want to prevent Europe breaking apart.”

Germany’s new “erratic” foreign policy was not because of an increasingly complex world, Dr Kohl said, but because of a “shocking” lack of historical awareness among its current ruling class. “Under Franco German leadership”, he said, EU integration had shifted into reverse.

Beyond Europe, the former CDU chancellor said Germany was losing sight of its strategic relationship with the US, evidenced by abstaining from a UN Security Council resolution against Libya. The consequences were already clear, he said, citing the recent visit of President Barack Obama to France and Poland.

“After all what us Germans and Americans have been through, I never dreamed I’d see the day when a US president would come to Europe and fly right over Germany.”

Kohl must have read the Bruges speech by Merkel. However, the interesting reference is to “non-ideological measures”. Does he have the crusade by her to tame the markets in mind?

@ Actuary

“….and obviously it depends on exact bond bought.”

Correct. If you bought the Irish bonds maturing in November your return would be much bigger.

Anyways, i believe his actual original (way back when) suggestion was that an Irish bank deposit was a much better investment than a UK gilt or UK bank deposit. In terms of currency, credit and coupon, he’s almost certainly be proven right.

Bond, Eoin Bond

Leaving aside JTO’s obvious confusion between bonds and deposits, there is an additional factor to consider:

If I compare 2 strategies:

(i) Start 2011 with 100 euro and invest it once in ballabriggs to win English national at 14/1. Investment before and after race with rabobank

(ii) Start 2011 with 100 euro and invest with rabobank for 1 year

At end of the year (i) will show higher returns but (ii) was the much better investment strategy. (Assuming we all accept Probability of ballabriggs winning national < 6.67%)

Therefore, I am not sure that he has been “proven” right. The outcome has shown that his investment return has been higher (assuming for the moment he was advocating deposits) – but this does not imply the original decision has been “proven” right.


I believe we had this discussion before. JTO seems to have been in cash. But was he not extolling the value in Irish Gilts at the peak of the market when the blog abounded in talking tickers.

@ Actuary

I’m relatively sure he’s not confused about deposits and bonds. I think the entire conversation has been confused by what people read into his comments and it starting to go off on a tangent on a few occasions. This has been a debate which has been going on for around a year at this stage i’d imagine. I’ve previously done various different 5 year returns for Irish vs UK gilts from some date back in 2007 or 2008, showing currency, rate and credit returns, far more detailed than you’re offering above. We’ve been there and done that. You’re coming into the BB House on Day 366 or so and throwing nonsensical long shot horses into the mix for some reason. Calling deposits in Irish banks ‘long shots’ seems to miss the key point that many people have repeatedly made – the ECB, the EU and advanced economies don’t ‘do’ bank runs. Deposits were always and will always be extremely safe absent some sort of EZ collapse. Maybe that ultimately happens, but its more generally been seen as the long shot up until the last few week (where the panic is itself somewhat overdone). Ultimately, in the long run, an investor is proven right by his return, which in this case would seem to back up his argument rather than take from it.

@bond, eoin bond

I accept my example was extreme but it does appear that the market at least does not view the situation as definitivly as you do.

I do not accept in the long run an investor is proven right by his return. That is where we ultimately differ and what my example was meant to show.

Also JTO says in his comment above that he has been saying for the past year that Irish Bonds would show great returns. Then when challenged you say he was talking about deposits.

Someone is confused


You cannot be a true actuary. No one in that profession would know of the existence of the Grand National.

The only confusion (which I may indeed have been responsible for) was in relation to where my own savings were invested. I am not a professional investor. I don’t issue financial advice for a living. I simply express a general preference, informally over a cup of tea with my financial advisor at the bank, as to what the bank does with my savings, and in 2007, just after Gordon Brown became PM, I told the bank that I wanted my savings invested south of the border, because it was clear that Gordon Brown was going to allow inflation to soar in the UK, and the UK press was writing non-stop about the great advantage to the UK of not being in the euro being that it could devalue the pound sterling till its heart’s content. Even I could see that this all spelt bad news for my savings. At one point, I thought that my Ulster Bank (Belfast branch) had invested them in Irish bonds and said so here (hence the confusion), but it turned out that they hadn’t, and instead had them in deposit south of the border. I wish now that they had bought Irish bonds. Even so, the interest rate/inflation rate/exchange rate combination since then has resulted in the return on my savings since 2007 being vastly superior to what it would have been if my bank had invested my savings in Gordon Brown’s UK bonds at the time. Can anyone seriously dispute this?

Regarding losses on Irish bonds, someone correct me if I am wrong (as I said, I freely admit to not being a professional investor), but, if I had bought a 10-year bond, say, in 2007 or anytime since, wouldn’t the so-called losses only occur if I was panic-selling the bond prematurely now. If I had bought a 10-year bond at 4% in 2007, at 5% in 2008, at 6% in 2009, at 10% in 2010, or at 14% earlier in 2011, I would now be collecting a fantastic real interest rate, and, assuming no default, would additionally get back the sum I bought it for 10 years later. I would only lose if I panicked at the possibility of default and sold it off to another trader cheaply now, who was taking advantage of my panic. But, that’s the whole point, if there is no default (and no default seems increasingly likely to be the likely outcome), that would be a stupid thing to do. It is like my modest bet with Paddy Power on Man Utd to beat Man City in the Wembley match a few weeks ago. If I had panic-sold it to a professional gambler at half-time, when Man City were winning 2-0, I’d have taken a hit. But, I kept the faith, kept my bet, and was rewarded when Man Utd won 3-2. Ditto if only I had possessed the sense and foresight to buy an Irish bond offering 14% interest a few months ago. Alas, I hadn’t.

@JTO – first point – fair enough as far as it goes (though not sure I get the “I wish they had bought Irish bonds” point – you could buy more of them now for the same money (plus the interest from your investment).

Second paragraph – I dont think losses “only occur if you panic sell” – the bonds have lost value – end of story. Whether you choose to sell them or not is up to you.

They may gain in value (or fall) in the future but you have certainly lost money. Similarly if you bet on Man Utd in wembley match you were certainly down money at half time (and someone who bet on man city was up money).


To extend your logic further – you would have not really gained on the deposits until you transfer them back into sterling.

Since you havent done this you cant have it both ways!

@ Actuary (and JTO)

here’s the far more thorough situation JtO painted for himself a few months back, detailing how in 2007 he changed from GBP to EUR.

Here were my calculations based on that decision (as at 2/6/11)):

“June 2007:

Irish 4.6% 04/2016 bond. Cash price 99.882 (current 76.13). Yield 4.61%.

In the meantime you’ve rec’d 13.8% in nominal coupon flows. And you’re sitting on a mtm loss of 24.96% if you sold it. But you are also sitting on a 30.9% currency profit if you’re basing back to GBP. So net you’d have a 6% gain on top of the coupons, so 19.86% overall return if you exited today.

UK Treasury 4% 09/2016. Cash price 89.57 (current 108.95). Yield 5.459%.

In the meantime you’ve rec’d 13.4% in nominal coupon flows. You’re also sitting on a mtm profit of 21.6% if you sold it today. So 35% return overall if you exited today.

HOWEVER, that MTM profit on the UK Treasury is down to the fact that its a fixed rate bond, and rates have collapsed in the 3 years. If you’d had some sort of floating exposure instead, or if rates hadn’t collapsed, you wouldn’t have had that gain, although the loss on the Irish bond would have been bigger too (every 1% difference in interest rate outlook to 2016 is worth about 3 cents or 4% difference in the current mtm on the Irish). Difficult to figure it out exactly, but if neither EUR or GBP rate outlooks had changed at all 2007-2011, but credit outlook was same as today, and currency was the same as today, you’d have mtm’s of -36.56% on Ireland and +2.5% on UK Treasury. So, vs figures above, it bring Irish return to +8.14% and UK return to +15.9%

Thats if you exited today. On a hold to maturity basis, assuming both interest rates and FX rates remained unchanged until 2016, and the Irish state doesn’t default (both big if’s), your eventual returns would be as follows:

Irish: 41.4% in nominal coupons, 0.12% in nominal redemption, 30.9% currency appreciation. So 72.42% overall in GBP terms.

UK: 40.2% in nominal coupons, 11.43% in nominal redemption, zero currency appreciation. So 51.45% overall in GBP terms.”


Updating to today, ignoring coupon flows, IRISH 2016 is now @ 86.00 and UKT 2016 is @ 112.20. EUR/GBP is almost exactly unchanged. So the Irish mtm loss goes to -13.8% (or mtm profit of +17.1% if you include currency), and the UKT mtm profit goes to +25.26%.

Currently there is therefore still a mtm loss on Irish vs UK, but getting smaller, but still an eventual large absolute outperformance gain on Irish vs UK if held til maturity. Mtm gains increase significantly on shorter dated investment (Nov 11 Irish trae above par), and absolute outperformance is roughly similar on shorter dated investments (coupon flows similar so just the currency gain to worry about really).

@ Actuary

re long run

the point is that you can get lucky with a 14/1 shot in the short term, but in the long term luck eventually gets replaced with knowledge and skill. Is JP McManus ‘lucky’ with his horse picks, or does he appear to know what he’s doing (yes, a very simplistic example given where JP actually earns the bulk of his money, but you get my point – luck gets eradicated in the long run and gets replaced with risk-weighted returns).

@Bond, Eoin Bond

Agreed – but since many investment strategies (such as investment in deposits in Irish banks) give better returns which compensate (inadequately in my opinion) for a small probability of default the majority of the time investors in Irish bank deposits will be get better returns – however say 5% of the time their returns will be catastrophic.

We have no evidence of anyones investment expertise over either a long run or over a large sample size. We are comparing basically one investment over a very short period and you are drawing conclusions.

I have to admit that the one and only criteria I have when it comes to evaluating whether or not an investment was good or not is the ROI.

What other possible criteria are there?


There may not be other criteria but it is important to recognise that ROI does not give a definitive answer.

I gave one extremely simplified answer above. I recommend Fooled By Randomness for reading on the subject.


it seems we’re talking about two different things:
Quality of investment
Quality of investment advisor

The ROI of an investment upon maturity or upon cashing in is to me the one and only deciding factor when evaluating a past investment.

Investment advisors are more difficult to evaluate. Napoleon preferred his generals to be lucky. I’m the same and an investment advisor who claims to have had bad luck in the past, the fooled by randomness argument, will have some convincing to do if I’m to let him/her handle my future investments.

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