Oxford Economics: Greece Stands Out in the Realignment of Eurozone Spreads

Greece emerges as the country facing the greatest long-term challenges. Despite improvements in its fiscal metrics, the Oxford Economics model indicates that its market spreads are below fair value. This is mainly due to the structure of its debt, as most of it is held by institutions under favorable conditions. However, in the long run, the need to maintain large and sustained primary surpluses, coupled with the economy’s structural vulnerabilities—such as a high current account deficit and reliance on tourism—are expected to push spreads higher.

By contrast, Spain and Portugal benefit from strong growth and improving fiscal fundamentals. Their spreads are considered slightly above fair value, with forecasts pointing to a modest increase in the coming years. Italy, while currently enjoying unprecedented political stability, still suffers from high debt levels and weak growth. As a result, its borrowing costs are expected to remain above most other peripheral countries, except Greece.

The biggest surprise is France. For the first time, its bond yields are higher than suggested by fundamentals, reflecting a loss of political stability. Oxford Economics forecasts that the spread between French government bonds and German bunds will stabilize around 90 basis points, driven by heightened political and fiscal risks.

Overall, Oxford Economics expects the new spread hierarchy to persist. Southern European countries will remain supported by fiscal improvements, political stability, and solid growth, while France will remain under pressure due to its fragile public finances and political turbulence. Greece, although currently benefiting from historically low borrowing costs, remains a special case: over the medium to long term, it is projected to experience the largest spread increase, driven by demanding fiscal obligations and structural economic weaknesses.

Source: pagenews.gr