(Bloomberg) -- A remarkable role reversal is underway across the euro area just over a decade since a series of fiscal crises almost broke the single currency.

Back then it was the so-called periphery countries of Portugal, Italy, Ireland, Greece and Spain drawing the ire of investors after running up massive debts.

Now it’s the core nations of Germany and France which are having to increasingly explain themselves amid budget crises and fiscal plans that are running up against European Union limits.

While a repeat of the 2012 turmoil isn’t in the cards, the new fiscal landscape has already shifted investor behavior. They’ve been leaning into the bloc’s peripheral government bonds over traditionally safer notes, counting on better returns as situations switch.

JPMorgan Asset Management has loaded up on Spanish debt alongside Neuberger Berman, where fund managers also favor Portugal and Greece. Goldman Sachs Group Inc. and Societe Generale SA forecast parts of Europe’s periphery will continue to outperform next year.

Such is the change that Commerzbank AG contends the old country bucket labels have become obsolete. That would mean an end not just to “core” and “periphery,” but to the crass acronym PIIGS, coined during the debt crisis that left some countries in need of huge bailouts.

The shift has slipped somewhat under the radar amid the broader ructions in global bond markets. As a fierce sell-off swept from US Treasuries through to European sovereign debt, smaller issuers such as Portugal, Ireland and Greece beat peers, with their spread over larger counterparts such as Germany narrowing. Yields on Portugal’s 10-year bonds are down almost 40 basis points this year, Greece double that amount.

Germany, meanwhile, has suffered a string of bad news. Its economy is forecast to shrink this year, and the outlook has been further undermined by a budget crisis.

Neighboring France got a ticking off from the European Commission, which told it to rein in spending to meet the bloc’s fiscal rules.

“A lot of the European pessimism really comes from the German economy,” said Robert Dishner, senior portfolio manager at Neuberger Berman. “It’s actually the peripheral economies that are the ones holding up better than the core.”

The positive view has come alongside ratings upgrades. In recent weeks, Portugal was raised at Moody’s Investors Service and Greece was lifted to investment grade at S&P Global Ratings.

Even Italy, Europe’s long-time poster child for irresponsible fiscal plans, got a pick-me-up this month when Moody’s scrapped a negative outlook, pulling it back from the brink of junk.

“Smaller euro area countries have significantly improved their fiscal metrics and their positive prospects have been reflected in European government bond markets,” said Sean Kou, a rates strategist at SocGen. “The divergent dynamics should continue in both ratings and market pricing.”

There are other issues drawing investors to peripheral debt. Goldman Sachs points to growth rates in Spain, Portugal and Greece supporting their bonds next year, alongside more modest net issuance levels.

There’s around €50bn coming from the three nations in 2024 compared with almost four times that from France and Germany, according to Goldman Sachs. Spain sold three- and nine- month bills this month with lower yields than those paid by equivalent German notes at the moment of the auction.

The recent risky history still leaves peripheral bonds at the mercy of swings in global risk appetite. The European Central Bank, whose bond buying has helped to keep spreads in check, has put in place a new backstop — the Transmission Protection Instrument — for when its current programs wind down.

But for Dishner, any selloff would provide an attractive entry point to add more exposure to Portuguese, Greek and Spanish debt markets.

“Historical correlations could see spread widening contaminate other markets,” he said. “We would use this as an opportunity to add more exposure in those countries where we like the fundamentals.”

JPMorgan Asset Management, which is overweight Spanish government debt across its portfolios, says peripheral bonds are less at risk to a significant widening than they used to be. Spain’s spread over Germany has been narrowing even amid recent uncertainty over the formation of a new government.


Many periphery countries paid a high price to improve their fiscal position, imposing years of austerity that severely eroded spending on public services.

While the aggressive spending limits remain controversial, the effort has put countries including Portugal, Ireland and Greece on track for primary surpluses next year — a positive balance excluding interest costs — while France and Belgium are heading for the biggest deficits.

But there's less opportunity for investors to buy government bonds in countries such as Greece due to a large portion of debt still being owned by official creditors. Greece benefits from the European Stability Mechanism funding 76% of its debt, according to S&P.

“A lot of these countries reformed their fiscal situations since the European debt crisis to the point where they don’t really yield very much anymore,” said Idanna Appio, portfolio manager at First Eagle Investments. “You might as well just own France and get a little more liquidity.”

But ultimately, the combination of aggressive ECB tightening and varying sensitivities to the Ukraine war have changed fundamental dynamics across European government debt markets, according to Commerzbank. Relative value trades are back and the country tier system has become redundant.

“Markets have fractured from the traditional country buckets,” said Michael Leister, head of interest rates strategy at Commerzbank. “Fundamentals no longer justify the long-established core, semi-core and peripheral tiering.” 

--With assistance from Alice Gledhill and Aline Oyamada.

©2023 Bloomberg L.P.