What it means
The term became common around 2009 and 2010, when investors began to doubt whether some eurozone governments could keep borrowing at affordable rates. Greece was the first to lose market access, and concern spread to the other four.
Commentators grouped them together because they looked alike on debt, deficits or banking weakness, even though their situations differed. The differences were large.
Greece had a public finance problem, Ireland and Spain had banking and property problems after a boom, Portugal had slow growth and heavy borrowing, and Italy had a very large existing debt. Treating the five as one block hid these details, which is why careful analysts criticised the label.
The crisis showed up in government bond markets. Investors demanded higher yields (the annual return on a bond) from these countries than from Germany, whose bonds were seen as the safest in the eurozone.
The gap between the two yields, called the spread, became the main gauge of fear. Several of the five received rescue loans or support programmes from other European governments and the International Monetary Fund.
Greece, Ireland and Portugal took full bailouts, while Spain received support aimed at its banks and Italy borrowed on the markets throughout. In return, governments agreed to cut spending and reform their economies.
For a business reader, the term still appears in history, in risk analysis and in older reports. Companies with customers, suppliers or bank exposure in southern Europe watched these markets closely because rising borrowing costs hit local demand and payment times.
The episode also taught finance teams to ask where their counterparties (the other parties to a deal) are based. Today the acronym is best treated as a historical label rather than a precise category.
Using it in a current meeting can come across as dated or insensitive, and it is usually better to name the specific country and the specific risk. Analysts still study the episode as a case of how government debt worries can spread between neighbours.
In practice
Real-world examples.
Example
A multinational manufacturer reviews its customers in Southern Europe in 2011 and finds payment times lengthening. Its credit manager tightens credit limits and requests earlier payment from the most exposed buyers. Cash collections improve within two quarters.
Example
A bond fund manager sells holdings in a stressed government's debt after the spread widens from 2 to 5 percentage points. The fund moves part of the money into safer bonds. It accepts a lower return in exchange for lower risk of loss.
Example
A university finance office writes a case for students on the euro crisis. It uses the five countries to show how a shared currency removed each country's ability to devalue its own money. Students then compare the policies that followed.
Formula
Calculation
Sovereign spread = yield on the country's government bond - yield on the benchmark bond
In this hypothetical example, a 10-year government bond from a stressed country yields 7.0%, while the benchmark German 10-year bond yields 1.8%. The spread is 7.0% - 1.8% = 5.2 percentage points, which is 520 basis points (one basis point is 0.01%).
On $10,000,000 of borrowing, that extra yield means the stressed government pays 5.2% x $10,000,000 = $520,000 more per year in interest than the benchmark borrower. Over a 10-year bond, the extra cost is roughly $5,200,000 in interest, ignoring compounding and changes in the yield.Case study
Seen in the real world.
Marlowe Industrial Supply is a fictional European distributor, and this story is illustrative. In the midst of a regional debt scare, its finance director noticed that 30% of its $20,000,000 annual sales came from customers in countries whose government borrowing costs were soaring.
She ran a simple test of what would happen if those customers paid 60 days late instead of 30. The delay would tie up an extra 30/365 x $6,000,000, or about $493,000, of working capital (the cash needed for day-to-day operations).
The company arranged a credit line of $500,000 and offered small discounts to customers who paid early. When payments did slow, the line covered the gap and operations continued as normal. The illustrative lesson is that country-level stress can be tested with simple arithmetic.
Watch out
Common mistakes.
- Treating the five countries as identical, when their problems were different in cause and size.
- Assuming the label describes the present, when it refers mainly to the early 2010s.
- Using the term in client or public settings without thinking, since many consider it offensive or careless.
Questions
People also ask.
Which countries does PIIGS include?
Portugal, Italy, Ireland, Greece and Spain; some versions swapped in other countries or dropped one.
Why did bond yields rise in these countries?
Investors feared that governments might not repay in full, so they demanded extra return to compensate for that risk.
Is the crisis over?
The acute phase eased after the central bank pledged support and governments introduced reforms, though debt levels and the risk of renewed worry remain topics of debate.
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