If EU Bailouts Were a Portfolio, Someone Would Be Fired

European bailouts: investors are sick of them. Every six months or so, the European debt crisis seems to move from country to country in what can only be described as a period of rolling crises.

As an interesting thought exercise, consider what a portfolio of the bailed out countries would look like and how it has performed over the course of the bailouts.

For reference, the bailout train has so far made stops in Cyprus, Greece, Hungary, Ireland, Latvia, Portgual, Romania, and Spain. In total, approximately 546.8 billion euros of Troika funds have been allocated to bailing out nations with the number crossing the 600 billion euro threshold if private sector funds and bail-in funds are included.

However, the bailout has only used some 482.2 billion euros, raising questions over the entire process of bailouts.

If this cash were a portfolio, it would be approximately 12 percent in cash. Remember, this cash is in euros, so not only is the portfolio not earning a return on cash, but it is exposed to euro risk.

Over the course of the bailouts, the euro has declined from as high as near 1.50 to below 1.20. Thus, this is not only a low-return position, but also one that bears a lot of risk.

As of Sunday, 10 billion euros has been granted to Cyprus and this will be assumed to be used in full. Thus, the portfolio has a small, 1.8 percent allocation to Cyprus. Marking November 2008 as the true onset of the crisis (Hungary aid package in November 2008), then looking at the stock market of Cyprus, this investment has lost an astonishing 88.75 percent. Thus, the 10 billion euros produced an annually compounded return of negative 34.29 percent.

Moving to Greece, many investors will be familiar with the travails of Greece. Greece has received multiple Troika bailouts totaling 245.6 billion euros. The first bailout was made in May 2010 and but since the onset of the crisis in 2008, the Athens Stock Exchange Index has lost approximately 46.15 percent. Thus, the annualized return of this investment equates to negative 11.64 percent compounded annually.

Hungary may be one of the few exceptions to the rule of losses in this thought experiment. Since the bailout in 2008, the domestic stock index has gained about 22.5 percent. Annualized, this return equates to 4.14 percent per year, still well below the country's long-term bond yield. Thus, even the investment had a positive return, on an opportunity-cost-weighted basis, it still lost money because it did not gain more than a supposedly safer investment.

Ireland has been touted as the case of bailouts working to perfection. European leaders have touted the country's export-driven recovery since it was forced to bail out its banks following a massive property bubble pre-2008. The stock index in Ireland is up substantially since October 2008, having risen some 66.67 percent in the period. Thus, the annualized return on the EU's 67.5 billion euro bailout is 10.76 per year, a pretty decent return.

Although rarely discussed, Latvia's 7.5 billion euro bailout, of which 4.5 billion euros has been used, was the second bailout, following on the heels of Hungary's bailout. Latvia's stock market in Riga has rallied approximately 6.4 percent since October 2008. Thus, the annualized return of the investment equates to a mere 1.25 percent, barely a positive return and negative on an inflation-adjusted basis.

Portugal received 78 billion euros as part of its bailout as the country has slowly recovered from a massive debt-fueled property bubble. Since the beginning of the bailouts, the Portuguese stock index has declined about 12.8 percent. On an annualized basis, this return equates to a loss of about 2.7 percent per year.

Romania also is one of the lesser-known nations to be bailed out although it receive a sizable 19.6 billion euros and has been allocated a potential 25.7 billion euros in funds. Since October 2008, the country's stocks have rallied 27.7 percent. On an annualized basis, the return on this investment equates to about 5.01 percent per year, not terrible but not great either.

Lastly, Spain received its massive 100 billion euro credit line last summer to bail out its ailing banks, although only 41.4 billion euros of this have been used for recapitalizations so far. Since the beginning of the bailouts, Spain's Ibex Index has declined about 14 percent. Annualized, this return equals a loss of 2.97 percent per year.

Looking at the entire portfolio, the portfolio, using the same indices, would have returned a cumulative loss of 17.35 percent or a loss of 3.74 percent annualized. Basically, the portfolio manager would have been fired long ago for returns like this.