Must-know: Investing in the PIIGS nations


Nov. 24 2019, Updated 11:58 p.m. ET

A brief history of the PIIGS

The PIIGS nations consist of Portugal, Ireland, Italy, Greece, and Spain. Due to the economic recession that started in 2008, several members of the European Union (or EU) became historically known as PIIGS. Substantial economic instability was common among these nations, especially in 2009.


PIIGS economics

The PIIGS nations are Eurozone’s most troubled economies. Considering historical and recent economic developments in these nations, most of them have been in serious financial trouble in regards to sovereign debt. The trouble with the PIIGS nations and the Eurozone economies lies in their monetary union.

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Since they all use a single currency—the Euro, which is printed and issued by the European Central Bank (or ECB)—these nations have no power over the currency they use. In times of financial distress when any of these countries need to pump liquidity into their economy, they can’t print money. They can only borrow more money from the ECB. This is the fallacy of a monetary union.

Recently, the majority of the PIIGS nations seem to be recovering thanks to improved fundamentals. Falling government bond yields in most of these nations signals investors’ increasing faith in Europe’s most distressed group of nations.

What makes the PIIGS nations attractive to investors?

There’s a huge public debt burden and a high level of unemployment in these nations. The market valuations for debt issued by these countries is cheaper in terms of price than the more stable European economies. The additional credit risk attached to these nations ensures yield-seeking investors better returns than debt of developed and more stable economies.

Investors willing to make money from these regions would fall under a similar category with the high-yield bond investors in the U.S. They invest in debt issued by below-investment grade companies in search of yield. They’re willing to take on the higher credit risk.

Popular exchange-traded funds (or ETFs) like the iShares iBoxx $ High Yield Corporate Bond ETF (HYG) and the SPDR Barclays Capital High Yield Bond ETF (JNK) invest in high-yield or junk debt in U.S.

ETFs tracking the PIIGS nations like the Global X FTSE Portugal 20 ETF (PGAL) and the iShares MSCI Ireland Capped (EIRL) have performed better this year. These ETFs have delivered positive returns. They have outperformed the largest and the most popular European ETF—the Vanguard FTSE Europe ETF (VGK). VGK has delivered flat-to-negative returns since the start of the year.

The PIIGS nations were the first to be hit during Europe’s economic downturn. The next part in the series will discuss Europe’s downturn and the current state of the Eurozone recovery.


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