Beneath the public relations gloss, the Financial Times has issued a stark warning to investors and potential buyers of Greek debt: Greek debt is a ticking time bomb as the Government’s fake stability unravels and the countdown to a new financial crisis may already be underway.
In a recent analysis, the British newspaper notes that Italian, Spanish and Greek government bonds have emerged as unlikely winners in this year’s turbulent bond markets. Their yields have shown a consistent upward trend, narrowing the spread with Germany’s benchmark borrowing costs to historic lows.
Bond fund managers attribute this shift—especially when compared to the eurozone debt crisis era, when borrowing costs soared—to stronger-than-expected economic growth and increased debt-sharing within the European Union.
Italy, for instance, now pays just 0.9 percentage points more than Germany to borrow for 10 years—approaching the narrowest spread in 15 years. Spain, meanwhile, is borrowing more cheaply than France, with the spread under 0.6 points.
Germany’s own rising bond yields, driven by investor anticipation of Chancellor Friedrich Merz’s unprecedented €1 trillion in defence and infrastructure spending, have also helped compress these spreads.
During the eurozone crisis, such convergence would have been unthinkable. Back then, concerns about sovereign debt sustainability and a potential eurozone break-up sent spreads in “peripheral” countries like Greece soaring.
“The primary reason for credit spreads is to reflect the risk of default or break-up. That risk has now declined,” said Nicola Mai, government debt strategist at Pimco. He added that the convergence in bond yields “will continue.”
The Greek Exception
Yet Greece—the epicentre of the eurozone crisis and the catalyst for multiple EU bailouts—is at the heart of the Financial Times’ warning.
Although the spread on Greek bonds has narrowed to just 0.7 percentage points, the FT highlights the risks masked by this apparent calm.
“The upward trend has been relentless,” said Fraser Lundie, global head of fixed income at Aviva Investors.
Investors have poured into southern European bonds, even as global markets grow uneasy about rising public debt burdens, which are driving yields higher in major economies such as the US, UK and France.
Narrower spreads are being interpreted as evidence of improved fiscal fundamentals in southern Europe, aided by post-pandemic tourism booms and stronger service sectors. Spain, for instance, outpaced its larger eurozone counterparts in growth last year. Italy, under Giorgia Meloni, has surprised markets with a more stable and fiscally conservative government than many anticipated.
Greece, meanwhile, is experiencing a multi-year recovery, culminating in an investment-grade credit rating upgrade in 2023. Investors point to the EU’s shared pandemic-era debt issuance and signs of further fiscal integration as reasons to believe that borrowing costs will continue to converge across the bloc.
A Fragile Calm
However, the FT urges caution. The scale of Greece’s structural debt, persistent social pressures, and dependency on external capital leave it vulnerable—particularly if global interest rates remain high or EU integration falters. In such a scenario, the narrowing spreads may not reflect economic resilience, but misplaced investor optimism.
What looks like recovery could prove a fragile illusion—one that, once shattered, could mark the start of a new chapter in Europe’s debt saga.
