Greece’s debt situation shows temporary stability amid ongoing structural concerns

Greece’s public debt continues to decline as a share of gross domestic product, extending a multiyear trend of fiscal consolidation that has drawn praise from international creditors. However, the country is projected to maintain the highest debt-to-GDP ratio in Europe through at least 2036, according to the latest European Commission debt sustainability report. While short-term and long-term risks are considered low, medium-term vulnerabilities remain elevated due to the scale of outstanding obligations and the economy’s sensitivity to external shocks.

The latest projections show general government debt falling below 140 percent of GDP in 2026, reaching 138.2 percent, its lowest level since 2010. According to the 2026 budget, Greece is expected to record the largest reduction in debt as a percentage of GDP in the European Union for a sixth consecutive year. At the end of 2025, general government debt is estimated at €362.8 billion, or 145.9 percent of GDP.

Why Greek Public Debt Remains a Central Challenge

The European Commission ranks Greece among the countries facing the highest risk in reducing public debt, primarily because of its sheer magnitude. Even under the baseline scenario, Greece’s debt is expected to remain elevated in the medium term, reaching around 124 percent of GDP by 2036. That projection assumes Greece will maintain a structural primary surplus of 1.8 percent of GDP from 2026 onward, excluding additional demographic-related costs.

However, the report notes that sustaining such fiscal performance would be ambitious compared with Greece’s historical record. Additionally, questions surround economic growth prospects after 2026, when funding from the European Union’s Recovery and Resilience Facility is set to wind down. Many analysts point to this period as a potential turning point for GDP performance and, by extension, debt dynamics.

Growth and Interest Rate Dynamics

Debt sustainability depends heavily on the relationship between economic growth and borrowing costs. Under a more adverse interest rate-growth differential scenario, in which the gap worsens by one percentage point compared with the baseline, the debt-to-GDP ratio in 2036 would exceed the baseline projection by roughly 10 percentage points. Meanwhile, in a financial stress scenario where interest rates temporarily rise by 4.5 percent compared with the baseline, debt would exceed the baseline by about 2 percent.

Other stress scenarios reveal similar vulnerabilities, the Commission report indicates. If the structural primary surplus were 0.5 percent lower than in the baseline scenario, the debt ratio would be approximately 6 percent higher by 2036. In contrast, if the structural primary balance returned to its 15-year historical average of 4.9 percent of GDP, the debt ratio would be approximately 26 percent lower than the baseline by 2036.

Uncertainty and Risk Assessment

Stochastic simulations that factor in uncertainty point to a moderate level of risk due to the high starting debt level and wide uncertainty bands around forecasts. There is a 15 percent probability that the debt ratio in 2030 could be higher than in 2025, according to the report. Moreover, the forecast range spans roughly 40 percent, underscoring the unpredictability of long-term debt trajectories in an environment marked by global economic uncertainty.

Despite elevated medium-term risks, most analysts consider the overall sustainability outlook to be manageable, provided key conditions are met. These include preserving fiscal credibility and effectively absorbing European funds. Greece’s debt profile also benefits from favorable repayment terms on official-sector loans, which constitute the largest share of total debt.

Protective Measures and Future Outlook

Interest rate swap agreements signed in previous years have locked in historically low borrowing costs, reducing Greece’s exposure to sudden rate increases. Additionally, rounds of early repayments of bilateral loans have further strengthened the fiscal position. The long maturity profile of loans owed to the European Stability Mechanism and the European Financial Stability Facility also provides breathing room.

However, these favorable characteristics are not permanent, analysts caution. As global financial conditions evolve, the protective buffer they provide could gradually weaken. The country’s ability to maintain primary surpluses and absorb EU recovery funds will be critical in determining whether Greece can continue reducing its debt burden at the current pace.

The government’s fiscal consolidation efforts will face a key test in the coming years as EU recovery funding tapers off and demographic pressures mount. Authorities have not confirmed specific measures beyond 2026, leaving uncertainty about how Greece will navigate the transition period and maintain debt sustainability over the medium term.