Greece passes ESM debt stress test, only eurozone country to see debt fall under adverse scenario

ESM stress test

The European Stability Mechanism published its Euro Area Stability Watch report on 26 July 2026, assessing macroeconomic and financial risks for the single currency bloc. The analysis centres on a severe adverse scenario that combines a new escalation of tensions in the Middle East, a jump in energy prices, and a simultaneous sharp decline in US equity and bond markets. European investors would also suffer losses from the US asset downturn.

Adverse scenario mechanics

Each of the two shocks would on its own present a serious challenge, the report notes. Together they would push the eurozone economy into recession, with GDP contracting by 0.4% in 2027. Consumer price inflation would average 3.4% that year, temporarily approaching 5%. The ESM then maps the impact on member states' fiscal positions and government bond markets without any change in policy.

Debt trajectories under stress

Under this adverse baseline, public debt would rise in all eurozone countries by 2035 with two exceptions: Greece and Cyprus, where it would continue to fall. The eurozone-wide debt ratio would end up roughly 20 percentage points higher than in the ESM's baseline scenario, which is aligned with the latest European Commission forecasts. The report highlights the scale of fiscal adjustment achieved by Greece in recent years.

Baseline outlook for the eurozone

Even in the main scenario, the ESM projects that eurozone government debt will climb over the next decade, reaching 103% of GDP from close to 90% in 2025. The deterioration is driven by demographic ageing, the rise of defence expenditure to 3.5% of GDP, higher borrowing costs, and persistently sluggish growth. Greece, along with other countries that were in ESM programmes in the previous decade, is expected to keep reducing its debt burden. The International Monetary Fund and credit rating agencies also forecast a significant further decline in Greek debt, according to the report.

Q1 2026 data already shows divergence

Eurostat figures released alongside the report confirm the trend. In the first quarter of 2026, Greece recorded the fastest year-on-year drop in government debt within the eurozone, falling to 143.5% of GDP from 152.9%, a decrease of 9.4 percentage points. Over the same period, the aggregate eurozone debt ratio edged up to 88.9% from 87.2%.