Key facts
- Fitch upgraded Portugal's debt last week, its second such upgrade in a year.
- Portugal, Ireland, Italy, Greece, and Spain now have government bond yields lower than France.
- German 10-year bond yields reached their highest level since 2011 on Wednesday.
- Greece's debt-to-GDP ratio is estimated to fall to about 137% by 2026 from over 209% in 2020.
- Ireland's debt ratio has decreased from around 120% in 2012 to little more than 30% of GDP.
- Italy's debt-to-GDP ratio is forecast to overtake Greece's this year.
Fitch's recent upgrade of Portugal's debt, the second in a year, signifies a notable shift for the euro zone countries once collectively known as the PIIGS during the 2011 debt crisis. Fifteen years later, while global bond markets face renewed pressure from inflation and rising U.S. debt, the perceived heroes and villains of the euro zone have largely traded places.
Benchmark German bond yields have been under pressure, with 10-year yields hitting their highest level since 2011 on Wednesday, partly due to political developments in Germany. In contrast, Portugal, Ireland, Italy, Greece, and Spain have strengthened their fiscal positions, leading to government bond yields that are now trading lower than those of France, a country previously considered a euro zone powerhouse alongside Germany.
These former PIIGS nations have benefited from a series of upgrades by rating agencies. However, their recovery paths have differed. Italy's progress is hampered by the bloc's highest debt burden and persistently slow economic growth. At the end of 2011, 10-year government bond yields for these five countries were all around 7.5%, only easing after then-ECB President Mario Draghi's pledge to save the euro, which led to the euro zone's first quantitative easing program in 2015.
While the COVID-19 pandemic affected all five countries similarly, Russia's invasion of Ukraine caused their yield trajectories to diverge. Differences in energy import dependence and measures to combat soaring inflation drove this divergence. Currently, Italy and Greece offer yields above 4%, Spain around 3.8%, Portugal 3.7%, and Ireland 3.5%.
Greece has experienced the most significant turnaround in its sovereign rating, recovering between nine and 13 notches. Ireland and Portugal have also largely regained their lost credit standing, while Spain has recovered more slowly. Italy's rating gains have been more modest, limited to one or two notches across major agencies.
Regarding debt levels, Greece and Portugal have shown dramatic improvements. Greece's debt-to-GDP ratio is estimated to fall to about 137% by 2026 from a pandemic peak of over 209% in 2020. Ireland has achieved a significant reduction, with its debt ratio falling from around 120% in 2012 to just over 30%, largely driven by a surge in nominal GDP from multinational direct investment. Portugal has also made progress in cutting its debt, though less dramatically than Greece. Spain has also made steady progress. Italy, however, faces challenges with weak growth, and its debt-to-GDP ratio has been edging higher since 2024, projected to surpass Greece's this year as the most indebted country in the euro zone.