Greece among eurozone countries least exposed to prolonged high interest rates

Athens, Greece. Greece is among the eurozone economies least exposed to the effects of prolonged high interest rates, despite its heavy public debt burden, according to Morningstar DBRS.

The rating agency cited stronger economic growth, continued primary budget surpluses and an expected further decline in public debt relative to the economy.

Assessment of eurozone economies

Morningstar DBRS examined the impact of a “higher for longer” interest-rate environment on government borrowing costs and debt dynamics in nine eurozone countries: Greece, Germany, France, Italy, Spain, Portugal, Belgium, Austria and the Netherlands.

While higher bond yields are increasing pressure on public finances across the bloc, the effects differ substantially between countries. Greece, Spain and Portugal were identified as the least affected among the countries examined.

Rising borrowing costs

Government borrowing costs rose sharply in 2022 after the inflation shock and the European Central Bank’s subsequent monetary policy tightening.

Although inflationary pressures have eased, government bond yields have continued to rise in most countries and are broadly around levels last seen in the early 2010s.

Structural pressures

Morningstar DBRS said the persistence of higher yields increasingly reflects structural changes rather than inflation alone.

Governments are issuing substantially more bonds as many advanced economies run large budget deficits and refinance greater amounts of existing debt. Increased corporate borrowing is also competing for investment funds, while demand for longer-term government bonds has weakened following central banks’ reductions in bond holdings and changes in the behaviour of institutional investors, including pension funds.

As a result, investors are demanding higher returns to absorb a larger share of new government debt.