Staff Report
The Greek economy, after years of navigating turbulent waters, has demonstrably shored up its position. Borrowing costs have plunged, access to international markets is notably smoother, and global investors are viewing the nation with renewed confidence. This resurgence, however, presents a nuanced landscape where the benefits of rejoining the European economic mainstream are accompanied by a fresh set of challenges, particularly an increased vulnerability to external shocks.
One of the most striking indicators of this recovery is the significant improvement in Greece’s funding conditions, a development noted by Mathias Gnevoch, an analyst at the European Stability Mechanism (ESM). European sovereign bond markets have largely reconsolidated since 2019, reversing years of fragmentation that followed the eurozone debt crisis. This is particularly evident in May 2025, when the Greek 10-year government bond spread over the German Bund dipped below 80 basis points, a level not seen since 2007. Such figures harken back to a pre-crisis era when eurozone government bonds were largely perceived as equivalent by markets, underscoring the strong recovery marked by solid growth rates, sustainable fiscal surpluses, and a consistent decline in the debt-to-GDP ratio since 2021.
Beyond the realm of government bonds, Greece is also experiencing a pivotal moment regarding its standing in global equity markets. MSCI Inc., a leading provider of stock indices and market analysis, has initiated a public consultation on potentially reclassifying the Greek stock market from its current Emerging Markets category to Developed Markets status. This move by MSCI, whose indices are widely used by investors, fund managers, and financial institutions worldwide, carries significant implications. An upgrade would signal to the international investment community that the Greek market is now considered more mature and reliable. For instance, many large pension funds and institutional investors base their asset allocations on MSCI indices, meaning inclusion in the Developed Markets category could expose Greece to a broader and more stable investor base. This could translate into increased capital inflows, enhanced liquidity for listed companies, and potentially lower financing costs for businesses across the country, while also serving as a powerful endorsement of Greece’s economic progress internationally.
MSCI has acknowledged Greece’s fulfillment of criteria related to economic growth and its advancements in market accessibility and operational efficiency. Historically, the primary obstacles were market size and liquidity, concerns that are now being re-evaluated in the context of broader European market integration. A final decision is anticipated by the end of March 2026, with implementation likely following in the August 2026 index review. Such a reclassification would represent a significant milestone, validating years of economic reforms and fiscal discipline.
However, both the ESM and other financial institutions caution that this reintegration into the European economic “mainstream” is not without its complexities. More integrated markets inherently lead to stronger spillover effects between countries. This means that Greek bond yields are now far more susceptible to developments within larger eurozone economies. For example, a significant fiscal expansion announced in Germany in March 2025 reportedly caused an approximate 35-basis-point increase in the German 10-year yield, with Greek yields closely mirroring this trajectory. While this correlation signals a return to European normality, it simultaneously heightens Greece’s exposure to external risks, which may not directly stem from its domestic economic performance.
The ESM analyst, Mathias Gnevoch, further warns that despite the considerable narrowing of spreads, the possibility of them widening again remains a tangible risk. This is particularly true if economic conditions across the eurozone deteriorate or if unforeseen international events unfold. Global trade tensions or unexpected fiscal decisions made in major economies could directly impact Greece’s borrowing costs. Therefore, while the progress achieved is substantial, it is not guaranteed to be permanent. Continued prudent fiscal policies, further debt reduction, and ongoing efforts to strengthen the economy’s overall resilience are paramount to ensuring that the benefits of this return to European “normalcy” are sustained for the long term.
