ESM: Greece’s debt outlook remains positive despite adverse conditions

The report, titled “Euro Area Stability Watch”, assesses macroeconomic and financial risks for the euro area, as well as their implications for member states’ fiscal positions and sovereign bond markets. The analysis is based on an adverse scenario developed by the ESM, which assumes a renewed escalation of tensions in the Middle East, a surge in energy prices, and a significant decline in US equity and bond prices, resulting in losses for European investors as well.

Each of these shocks individually would represent a major challenge, but their combination would push the euro area economy into recession, with GDP contracting by 0.4% in 2027, while inflation would approach 5% (averaging 3.4% in 2027).

Under this adverse scenario, and assuming no policy changes, public debt would rise across all euro area countries by 2035, except Greece and Cyprus, where it would decline. The increase in euro area public debt would be approximately 20 percentage points higher than under the ESM’s baseline scenario, which is aligned with the European Commission’s latest economic forecasts.

Under the ESM’s baseline scenario, euro area debt is expected to rise over the next decade, reaching 103% of GDP from nearly 90% last year, driven by the impact of population ageing, higher defence spending reaching 3.5% of GDP, increased borrowing costs, and subdued growth rates. However, for Greece—and other countries that were under ESM programmes during the past decade—debt reduction is expected to continue.

In the first quarter of 2026, Greek debt declined at the fastest pace in the euro area, according to Eurostat data, falling to 143.5% of GDP, or 9.4 percentage points lower than a year earlier (152.9%). By contrast, euro area debt as a whole increased to 88.9% of GDP from 87.2% over the same period.

Significant further reductions in Greek debt over the coming years are also forecast by the International Monetary Fund (IMF) and credit rating agencies. The IMF projects that Greek debt will decline to 110.9% of GDP by 2031, from 145.7% last year, while French debt is expected to rise over the same period to 120.7% from 116%, and Belgian debt to 122.3% from 106.3%. Italian debt is forecast to edge down slightly to 136.1% from 137.1% of GDP.

This means that over the next five years, Greece’s debt ratio is expected to fall below not only Italy’s—something already anticipated from this year—but also below France’s and Belgium’s.

The continued rapid decline in debt is keeping the spread between Greek government bonds and German bonds at relatively low levels, despite heightened volatility and uncertainty caused by the conflict in the Middle East. Following the latest increase in global oil prices, sovereign bond yields rose internationally, with the yield on German 10-year bonds approaching 3.20% on Thursday.

The yield on Greek 10-year government bonds stood at 3.92%, remaining below the corresponding yields of French and Italian bonds, which exceeded 4%.