Rising interest rates: why the German finance minister is less worried about Greece

The last time a German finance minister was in Greece was in 2014.

As a result of the euro crisis in Athens, Wolfgang Schäuble (CDU) became the epitome of the hated austerity policy and reforms forced from above.

Eight years later, Christian Lindner, who has been in office for just six months, visits the Greek capital.

He wants to do things differently, smooth the waves, fill in ditches.

In Athens on Tuesday, the head of the FDP demonstratively praised the government of the southern European country, which has initiated changes and stabilized state finances in recent years.

At least until the coronavirus pandemic hit.

"The Greek government has made great efforts," says Lindner.

"We really appreciate that." It's an important week for Greece.

On Thursday, European finance ministers will in all likelihood decide to end enhanced monitoring of reform progress.

"This is a very positive signal," said Lindner.

Then there are only regular checks.

So everything ok?

By far not.

At 193 percent in relation to economic output, Greece still has the highest mountain of debt of all member countries of the monetary union.

Some fear that if interest rates rise, this could become a problem.

But it won't, say many Greece connoisseurs and also Finance Minister Lindner, who otherwise often emphasizes that debt in Europe must fall.

“Economy is developing quite positively”

In the short term, there is no reason to worry, says Lindner.

He points to the structure of Greek debt, which has changed significantly in recent years.

"The fact that the very high national debt should be able to be financed even with rising interest rates is mainly due to the aid granted by the international community," explains Commerzbank chief economist Jörg Krämer.

“More than 60 percent of Greek public debt is held by public creditors outside of Greece.

In addition, the loans have a fixed interest rate and, with an average of 18.2 years, a very long term.” Only around 26 percent are due within the next five years.

"The refinancing of government debt is only slightly more expensive as a result of the higher interest rates."

Greek expert Alexander Kritikos from the German Institute for Economic Research came to the same conclusion.

A large part of the Greek debt is even laid out for 50 years until 2070.

"It gives you some peace of mind.

That is why the risk is currently limited, also because the economy is developing quite positively.”

The European Central Bank (ECB) wants to raise interest rates again in July.

This is likely to put pressure on countries that will soon have to refinance large parts of their bonds.

In Greece, the debt level has also risen sharply during the pandemic, but the country is usually forced by its lenders to get by without primary deficits - i.e. present a balanced budget before interest payments are made.

That works because the European Corona reconstruction fund is still available for large investments, says Kritikos.

Inflation, which is currently around eight percent, is important.

“Of course, this helps highly indebted countries because it reduces the real debt burden.

However, high inflation can also necessitate aid for poorer sections of the population, which in turn could lead to new borrowing,

Commerzbank economist Krämer says that 2022 is still a special year.

“A budget surplus before interest payments is already planned for the coming year.

The fact that the Greek economy has found its way back onto the growth track is helping here.

In the meantime, the Corona-related slump has been more than made up for.” Despite all the problems, economic growth of more than three percent can still be expected in 2022.

Domestic consumption had recently proved to be a support.

Experts are expecting a boost in tourism from spring.

On the financial markets, the differences between Germany and highly indebted Southern European countries have recently widened again.

Example Greece: At the height of the sovereign debt crisis in March 2012, the yield premiums on ten-year Greek government bonds compared to comparable federal bonds had reached a record high of a good 32 percentage points.

In the years that followed, however, the so-called spreads fell continuously until, thanks to the ECB’s securities purchases to combat the consequences of the pandemic, they marked their all-time low of less than one percentage point in the summer of 2021.

Since then, risk premiums have risen to around three percentage points due to rising inflation and the expected interest rate hikes.

Germany's treasurer Lindner says that could become a problem over time.