Greece’s remarkable turnaround – The hidden weapon behind debt reduction

From 209% of GDP to 146% in five years and, if forecasts are confirmed, to around 125% by 2029. Behind this trajectory lies one of the most striking turnarounds in European public finances in recent years.

Fitch Ratings has placed Greece, Cyprus and Portugal under the microscope to explain how three economies that were at the heart of the eurozone debt crisis managed to secure three rating upgrades each since 2022. In Greece’s case, the distance travelled is particularly significant: from restricted default (RD) status in 2012 and the risk of a “Grexit” to BBB rating with a stable outlook.

However, Fitch’s message is not only about how far Greece has come. It is mainly about how different — and more difficult — the next stage of the journey is becoming.

The factors that helped drive the dramatic decline in debt after the pandemic are beginning to fade. The strong rebound in tourism has essentially run its course, Recovery Fund resources peak in 2026 and then decline, while inflation is no longer affecting to the same extent as in previous years.

From here on, the determining factors will be two: sustainable growth and primary surpluses.

Europe’s debt-reduction champion

Greece’s debt reduction stands out even among the three countries examined by Fitch.

Public debt fell from around 209% of GDP in 2020 to 146% in 2025, marking the largest absolute decline from the pandemic peak. Fitch forecasts a further reduction to around 125% by 2029.

The comparison with the rest of the eurozone is revealing. Greek debt is now around 37 percentage points below its pre-pandemic level, while the eurozone as a whole has reduced debt by only around 8 percentage points from its 2020 peak, with debt still around 4 percentage points above pre-pandemic levels.

Greece, together with Cyprus and Portugal, therefore did more than reverse the surge in debt caused by Covid-19. It achieved genuine deleveraging, moving well below its pre-pandemic position.

Growth was the main driver of debt reduction

The single most important factor behind this turnaround was growth.

Greek GDP increased cumulatively by 22% over 2021-2025, compared with around 13.5% in the EU. Growth alone reduced Greece’s debt-to-GDP ratio by around 36 percentage points, according to Fitch calculations — the largest contribution among Greece, Cyprus and Portugal.

This does not mean Greece grew faster than Cyprus. The large contribution also reflects Greece’s exceptionally high initial debt level: the larger the denominator of the problem, the greater the impact of GDP growth on the debt ratio.

Three factors powered this growth: the labor market, the strong rebound in tourism and the investment recovery linked to the Recovery Fund.

Major labor market turnaround — but with limits

Greece’s labor market has undergone one of the most significant turnarounds in Europe. Since 2020, employment has increased by 14%, while unemployment has fallen by 8.7 percentage points, the largest decline in the EU.

Here, however, Fitch identifies one of the factors that could constrain the next phase of growth.

Unlike Cyprus and Portugal, where the expansion of the labor supply was supported significantly by migration, Greece’s improvement has mainly resulted from the absorption of existing labor resources. Despite the sharp fall in unemployment, the labor force remains below 2019 levels.

In other words, one of the major reserves that fueled the recovery is beginning to run out, while labor supply constraints are becoming more apparent.

Tourism provided a boost — but the big rebound is over

A similar picture is emerging in tourism.

Greece entered the pandemic with tourism revenues accounting for around 9.8% of GDP. The collapse in 2020 subsequently created significant room for recovery, and the return of international travel became one of the key drivers of growth.

By 2025, tourism exports had recovered to around 9.5% of GDP, essentially returning to pre-pandemic levels.

This is precisely Fitch’s point: the major “gift” from comparing the economy with 2020 has now been exhausted. Tourism remains extremely important to the Greek economy, but it cannot continue to replicate the pace of recovery seen in the first post-pandemic years indefinitely.

Recovery Fund and the major investment bet

If there is one factor that could leave a more lasting mark, it is investment.

Greece has the largest allocation of Recovery and Resilience Facility (RRF) funds in the EU as a share of GDP, equivalent to around 16% of 2023 GDP over the 2021-2026 period.

Grants and the large loan component have mobilized investment and private co-financing in energy, digitalization and infrastructure, helping the economy maintain its momentum beyond the tourism recovery.

There is, however, a critical detail. The impressive rise in Greek investment started from an exceptionally low base: gross fixed capital formation had collapsed by around 60%.

And time is running out. RRF resources peak in 2026. The real challenge, therefore, is not only to absorb the funds, but to ensure they permanently increase the economy’s productive capacity once the European financing boost begins to fade.

The “hidden weapon” of Greek debt

Greece still has a clear advantage in one area: the structure of its debt.

A large share of the central government’s liabilities is held by official creditors — the EFSF, ESM and eurozone governments — on favorable terms, with fixed interest rates below market levels, long grace periods and, in some cases, deferred interest payments.

The weighted average maturity of Greek public debt is around 20 years, almost twice that of most eurozone countries.

This was crucial when the ECB sharply raised interest rates. While market yields surged, only a small portion of Greek debt had to be refinanced each year at higher costs.

As a result, the average effective interest rate on the debt remained around 1.9% in 2022-2024. Combined with high inflation, real interest rates became negative, and this mechanism reduced the debt-to-GDP ratio by around 19 percentage points over 2021-2025.

This was the largest contribution from this channel among the three countries.

Primary surpluses key drivers

Growth was the largest mechanical factor behind the decline in debt. But what, according to Fitch, distinguished Greece, Cyprus and Portugal from other eurozone countries was that growth was accompanied by sustained primary surpluses.

In Greece, the cumulative contribution of the primary balance to debt reduction in 2021-2025 was relatively limited, at around 6.8 percentage points, because the country still had a primary deficit in 2021 and the balance was roughly neutral in 2022.

From 2023 onward, however, the picture changed significantly.

Fiscal performance has repeatedly exceeded expectations, with Fitch attributing the improvement to structurally stronger revenues, improved tax collection, the digitalization of tax administration and tight expenditure controls, also supported by savings from previous pension reforms.

Notably, spending as a share of GDP fell by 8.3 percentage points between 2021 and 2025, compared with around 2.3 percentage points on average in the eurozone.

The transformation of Greek banks

Fiscal consolidation was not the only prerequisite for the upgrades.

Fitch describes the transformation of Greece’s banking system as one of Europe’s most significant post-pandemic turnarounds.

Non-performing loans, which accounted for around 46% of total loans at the end of 2017, had fallen to 3.5% by the end of 2025. Banks returned to sustainable profitability in 2022 for the first time since the crisis, capital adequacy ratios strengthened and deposits stabilized.

This transformation significantly reduced the risk of further state capital injections and restored banks’ ability to finance the private sector. It was enough for Fitch to remove the negative qualitative adjustment it had maintained due to banking-sector risks, directly contributing to the country’s upgrade.

Greece’s main area of weakness

Not all of the old vulnerabilities have disappeared.

The current account deficit has remained above 5% of GDP since the pandemic, while the net international investment position stands at around -137% of GDP, among the weakest in the eurozone.

Unlike Portugal, where a major improvement in external balances was an important driver of upgrades, this has not been a positive catalyst for Greece.

What Greece needs for the next upgrade

Fitch maintains Greece at BBB with a stable outlook and makes clear that the next phase will not be judged by the same criteria that determined the country’s exit from the crisis.

For Greece, further improvement will require continued fiscal discipline, sustained primary surpluses, further debt reduction and, critically, evidence that the country can achieve a higher potential growth rate.

Fitch forecasts average Greek economic growth of 1.8% in 2026-2027. This is above the 1.3% it forecasts for the eurozone, but clearly below the performance recorded during 2021-2025.

That is precisely what makes the next phase more difficult.

The warning behind the praise

Fitch’s conclusion goes beyond Greece and concerns Europe in its entirety: growth alone is not enough to sustainably reduce debt. Spain and Italy benefited from several of the same post-pandemic tailwinds, but failed to achieve comparable fiscal adjustment and, as a result, made less progress in their ratings.

For Greece, the biggest risk does not necessarily lie in the markets. It lies in the possibility that political support for primary surpluses and debt reduction could weaken over time.

Pressures will increase as memories of the crisis fade, demands for public spending rise due to population aging and increased defense needs, and the political benefits of fiscal discipline diminish.

The next upgrade will have to be earned in a far less favorable environment. This time, the greatest ally will not be the economic cycle, but sustained performance.

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