The Eurozone is facing a challenging situation. Just within a week, three headlines emerged: "Italy as risk resurfaces," "The elephant Italy returns", and "The will for sound fiscal policy is not evident in Italy" (cf. Börsen-Zeitung from October 17, 19, and 20). A fourth headline could have been added: "Italy overtakes Greece as the debt champion." Although the latter will not happen until 2026, the path is clear. By then, Italy will have a national debt of 140% of the gross domestic product (GDP), which is similar to the current level. In contrast, Greece is on track to reduce its debt from the record high of 206% in 2020 to 135% of GDP by the end of 2023. Greece appears to be continuing its financial recovery – the rating agency DBRS Morningstar had recently reinstated the country's Investment Grade status. Italy, however, faces the risk of being downgraded to junk status.

What can we learn from this situation? Firstly, policies aimed at reducing the debt ratio should target both the numerator and the denominator. Greece has outperformed all other EU countries with an economic growth of 8.4% in 2021 and 5.9% in 2022, and the projected 2.6% for the current year will also be significantly above the EU average. The robust growth did not just increase the denominator but also led to higher-than-planned tax revenues. Combined with fiscal discipline, this allowed Athens to make early debt repayments, thus, reducing the numerator. As growth and tax revenues slow down, the government now plans to tap more into the privatization pipeline. Since the identification of €50 billion in state asset sales in 2008, only €10 billion have been realized so far.

Secondly, Greece has been able to use financial repression to reduce its debt. With an inflation rate of 9.3% last year and an expected 4% this year, inflation is higher than the interest rates on government debt. After early repayments of relatively high-interest loans from the IMF in 2022, the Eurogroup's loans, with an interest rate just under 4%, are now in focus. Time and the slowly decreasing inflation rate are working in Greece's favor. Considering that the average debt interest rate is 1.4% and the average maturity period is 20 years – by far the longest in the Eurozone – Greece can only welcome forecasts of sustained higher interest rates.

Italy's situation is quite different. The government briefly enjoyed financial repression when the inflation rate climbed to 8.8% in 2022. Currently, inflation is below the yield on ten-year government bonds. With an average remaining maturity of six years for all outstanding government bonds, a significant volume needs to be refinanced annually, leading to rising interest costs. The spreads between ten-year Italian government bonds and ten-year Bunds have now exceeded 200 basis points. Given the lack of fiscal discipline and a new borrowing plan set to increase by 5.3% of GDP this year and 4.3% next year, market observers fear that rating agencies might strip Italy of its Investment Grade status. At that point, spreads are likely to reach 300 basis points or more, causing a dramatic decline in the value of Italian bonds and significantly shortening the ECB's balance sheet. It remains uncertain whether the ECB, as a strategic creditor of Eurozone countries, will have the strength to resist the euro's transition toward a lira-ization. Following the Greek tragedy, the Eurozone theater might indeed feature the Commedia dell’arte on its playbill.