Greece’s Debt Falls, but an Upgrade Waits: Fitch’s Verdict on the Economy

Fitch maintains Greece at BBB with a stable outlook, forecasting average growth of 2% in 2026–2028. Falling debt and strong public finances support the rating, while production constraints and external imbalances remain obstacles.

Greece is rapidly reducing its public debt, recording fiscal surpluses and growing faster than the eurozone average. Why, then, did Fitch stop short of an upgrade?

The answer lies in the assessment’s contrasting findings: public finances have strengthened considerably, but high debt and structural weaknesses continue to constrain Greece’s creditworthiness.

Fitch affirmed its BBB rating with a stable outlook, recognising fiscal discipline, resilient growth and a favourable debt-servicing profile.

At the same time, it described an economy still facing low savings, substantial import dependence and constraints on productive capacity.

The next challenge is clear: turning investment growth into stronger production, greater competitiveness and sustained income convergence.

Debt projected to fall by 21.5 percentage points

The strongest positive signal concerns public debt.

Fitch forecasts a decline from 146.1% of GDP in 2025 to 124.6% in 2028—a reduction of 21.5 percentage points, provided its baseline scenario materialises.

That decline rests on:

• Large primary budget surpluses.
• Nominal GDP growth.
• A favourable relationship between debt-servicing costs and economic growth.
• Active debt management, including early loan repayments.

The agency also expects Greece to cease having the eurozone’s highest debt-to-GDP ratio by the end of 2026, falling below Italy.

That would mark an important milestone without eliminating the underlying vulnerability. The median debt ratio among BBB-rated countries stands at 56.9% of GDP, substantially below Greece’s level.

Progress is considerable. So is the remaining distance.

Why the debt ratio does not tell the whole story

Fitch recognises that Greece’s debt structure limits financing risks.

Average maturity reaches 19 years, a substantial share carries favourable terms and fixed interest rates, and cash reserves are projected at approximately 12% of GDP in 2026.

The implicit interest rate on the existing debt stock remains around 1.5%, below expected nominal GDP growth of roughly 4%.

That 1.5% represents the average servicing cost of outstanding debt. It is not the interest rate Greece currently pays on new market borrowing.

The distinction explains why changes in bond yields do not immediately translate into equivalent changes in the government’s overall debt-servicing costs.

A surplus where comparable countries run deficits

For 2026, Fitch forecasts:

• An overall general government surplus of 0.6% of GDP.
• A primary surplus of 3.6% of GDP.

The overall balance compares with a projected median deficit of 3.1% of GDP among BBB-rated countries.

The primary balance excludes interest expenditure, explaining the difference between the two figures.

Fitch attributes the strong performance to rising tax revenue, social contributions and improved tax compliance.

It also recognises that Greece’s commitment to sound public finances has become more durable. Its assessment of the looser fiscal stance envisaged for 2027 is revealing:

“We view the looser fiscal stance for 2027 as a moderation of overperformance rather than weaker fiscal discipline.”

Growth of 2% puts investment delivery centre stage

Fitch expects average annual growth of 2% over 2026–2028, driven principally by investment and private consumption.

European funding, public investment and NextGenerationEU projects support capital formation.

However, the forecast depends on delivery: investment plans must be implemented effectively and on schedule.

Delays, labour shortages and execution weaknesses could affect growth. Rebuilding the capital stock after a prolonged period of underinvestment remains essential to economic convergence.

The 6.5% external deficit exposes another vulnerability

One persistent weakness is the current account deficit, which Fitch projects at 6.5% of GDP in 2026.

This measures the economy’s external transactions and differs from the government’s fiscal balance. A country can run a public-sector surplus while recording a large external deficit.

For Greece, Fitch links the imbalance to low domestic savings and import-intensive investment.

Purchasing equipment abroad can increase imports today while improving productivity later. The decisive question is whether that investment ultimately generates more competitive production and exports.

Energy dependence adds exposure to international price shocks. Tourism receipts, EU inflows and foreign direct investment support financing without eliminating the underlying imbalances.

• Stronger banks, an unfinished productivity challenge

The banking sector’s position has improved substantially. Fitch considers profitability, liquidity and capitalisation sufficient to limit the likelihood of government support being required.

Vulnerabilities nevertheless remain, including substantial reliance on deferred tax credits and exposure to external shocks.

Across the wider economy, falling unemployment coexists with skills shortages and production constraints. Fitch recognises the progress while stressing the debt crisis’s lasting effects:

“Real GDP remains well below its pre-crisis peak, and GDP per capita remains low relative to the EU average.”

Source: pagenews.gr