The debt crisis sweeping across Europe has produced a pejorative acronym that refers to the five countries considered most at risk: They are the PIIGS.

These five — Portugal, Italy, Ireland, Greece, and Spain — now find themselves at the centre of a worldwide debt watch. They share a number of attributes no finance minister would want to brag about — high government (i.e. sovereign) debt, high unemployment, and weaker GDP growth — in short, troubling ingredients that could lead to a potential default on bond payments by their hobbled governments.

It isn't just high debt levels that have focused attention on these five. (After all, the U.S.  has one of the higher debt-to-GDP ratios in the world and its debt is still rated AAA). It's all about investor confidence in the countries, and how likely the world perceives they are to continue making regular interest payments on their government bonds.

As far as the PIIGS countries are concerned, the world is a lot more worried than it was a year ago.

Credit ratings cut

The Standard & Poor's ratings agency recently cut Greece's credit rating from investment grade to "junk" status. Portugal has also been dragged into the sovereign debt vortex with news that its rating has been lowered by two notches (although it's still considered investment grade). Spain had its sovereign debt rating lowered from AA+ to AA.

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Riot police spray tear gas against protesters during a rally in Athens on April 22, 2010. About 4,000 people marched against austerity measures. ((Panagiotis Tzamaros/Associated Press) )

A "junk" rating makes it more difficult and expensive to borrow money. Existing debt might even have to be restructured, which could result in some current holders of sovereign debt losing money.

The cost of insuring the debt of these five countries — especially Greece — has climbed steadily in recent weeks as debt worries mounted.

As for Greece, the eurozone countries and the IMF have come up with a conditional rescue package worth 120 billion euros.

All well and good. But financial markets are looking much further ahead. What if Portugal also needs a bailout? What about Italy? One bailout the eurozone can handle. But two or three? That is what has the world's debt, currency, and equity markets so rattled.

Euro drops 

The crisis has already seriously eroded the value of the euro. Last November, it cost about $1.60 Canadian to buy one euro. In late April, it cost only $1.33.

 Country  Probability of default in next 5 years
 Venezuela  48.5%
 Argentina  46.0%
 Greece  25.4%
 Portugal  11.7%
 Ireland  11.7%
 Spain  9.8%
 Italy  9.6%
 U.K.  6.7%
 Japan  6.0%
 U.S.  3.6%
 Germany  2.8%
 Note: No rating available for Canada
 Source: CMA DataVision data (March 30, 2010)

All five PIIGS countries, after all, use the euro. So they can't avail themselves of one potential solution faced by countries with crushing debt payments — a unilateral currency devaluation. They also can't bring in their own independent monetary policy.

Instead, the five will have to rely on some kind of fiscal pain — higher taxes and/or lower public spending — measures which aren't popular with the electorate and often face formidable opposition. 

And while the five PIIGS have been getting most of the attention, observers point out that the fiscal condition of most industrialized countries has markedly deteriorated in recent years.

The U.S., Japan, and the U.K., for instance, all have high government debt-to-GDP ratios. But the markets appear — at least so far — to believe that those countries can engineer a recovery with little risk of defaulting on bond principal or interest payments.

India — with a big debt burden of its own — is similarly seen to be more insulated from default worries because its growth prospects are healthy and most of its debt is held domestically.

It should be noted that none of the PIIGS countries has defaulted, unlike some other nations like Argentina, Turkey, Brazil and Indonesia, which have defaulted on public debt payments in the past. 

Note: Mouse over the highlighted countries to see how each is tackling its deficit woes: