Falling Greek Debt Cushions Impact of Global Borrowing Costs

Greece’s strong primary budget surpluses and sharp decline in public debt are limiting the increase in its borrowing costs as turbulence in global government bond markets pushes yields to levels not seen in almost two decades.

The yield on 10-year US government bonds, a key source of the market turmoil affecting other countries, reached 5% on Thursday, while 30-year yields climbed to 5.3%, their highest level since the 2007 financial crisis. Globally, government bond yields also reached a 19-year high, according to the Bloomberg index.

In Germany, the benchmark 10-year government bond yield for eurozone markets rose 34 basis points from a month earlier to 3.5%, its highest level in 17 years. Borrowing costs rose even more sharply in other major eurozone economies, with 10-year yields climbing 46 basis points to 4.44% in France and 43 basis points to 4.38% in Italy. In Britain, the 10-year yield rose 41 basis points to 5.37%, the highest among the G7 economies.

Greece sees smaller rise in borrowing costs

Against this backdrop, Greece has seen a smaller increase in borrowing costs than the three major European economies. The yield on Greece’s 10-year government bonds rose 40 basis points over the past month to 4.24%, according to Bloomberg data.

The development reflects the sharp decline in Greece’s public debt, which has helped prompt upgrades from international credit rating agencies.

Last Friday, Canadian rating agency DBRS raised its outlook for Greece’s BBB sovereign rating from stable to positive. The agency expects Greece’s debt reduction to continue despite the global rise in government bond yields.

US debt fuels investor concerns

Higher borrowing costs reflect rising inflation and the difficult fiscal position of major economies, particularly the United States, France and Britain.

In the US, large budget deficits have continued for years after the coronavirus pandemic. In 2026, five years after the pandemic, the deficit stands at around 6% of GDP, raising concerns among investors as public debt continues to grow. US government debt reached $40 trillion last month, equivalent to 126% of GDP.

The US finances most of its debt through the bond market, which has grown to $32 trillion.

US Treasury Secretary Scott Bessent has argued that the debt does not pose a major concern and will decline as the economy grows. Markets, however, remain sceptical.

Higher borrowing costs in recent years, compared with the near-zero interest rates seen during the pandemic, have intensified the problem by adding to debt-service pressures. US interest payments on government debt exceeded $1 trillion in 2026 and now represent the largest item in the federal budget.

Britain and France face similar pressures, with both countries spending more on interest payments than on defence.

Britain recorded a budget deficit of 4.3% in 2025, while its debt has reached 94% of GDP.

In France, markets remain on edge over fears that parliament may fail to approve next year’s budget ahead of elections scheduled for April and May. Investors have already targeted the country following the 2024 elections, which split the National Assembly into three blocs and triggered significant political instability.

France’s deficit remains close to 5% of GDP in 2026, while its debt is approaching 120% of GDP.

Energy shock raises inflation concerns

The deadlock in the US-Iran war and renewed hostilities in the Persian Gulf point to a longer-lasting energy shock. Markets expect central banks to raise interest rates to bring inflation back towards their 2% targets.

The European Central Bank raised its deposit facility rate by 25 basis points to 2.5% on Thursday, marking its second increase this year. The ECB expects the conflict in the Middle East to keep eurozone inflation above 2% into 2027.

Its latest forecasts put average inflation at 3% in 2026 and 2.5% in 2027, before easing to 2.1% in 2028.

Markets have also increased their expectations of a US Federal Reserve rate hike. The US central bank has kept its key rate between 3.5% and 3.75% since the beginning of 2026.

AI investment adds pressure to bond yields

A further factor behind the rise in government bond yields is the mass shift by companies focused on artificial intelligence towards capital-market borrowing.

These companies are turning to debt markets to finance investments worth hundreds of billions of dollars, adding to demand for capital and contributing to higher government bond yields.

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