A faint shadow is emerging on Greece’s economic horizon, one that demands more attention than it currently receives. While the disruption of globalized trade due to upcoming changes in U.S. tariffs is certainly a serious concern, for Greece, something else remains even more critical: debt.
Tariff changes will impact commercial transactions, slow down growth rates, and create pressure on the logic underpinning long-term debt restructuring. However, they won’t fundamentally change the unique feature that has helped Greece move out of market focus — stable debt prepayment.
This consistent strategy has allowed Greece to close its IMF loan early and begin repaying its first European intergovernmental loan (GLF) worth €52 billion ahead of schedule. In doing so, Greece appears to be following the example of Ireland and Portugal, which exited their crisis-era bailouts quickly by accelerating repayments and debt prepayment.
Early repayment of loans, combined with freeing banks from non-performing exposure, has changed the landscape and brought Greece’s credit rating back above investment grade levels.
Now, however, a new external factor threatens this trajectory — rising defense spending within NATO to 5% of GDP annually. Until now, defense expenditures in Greece hovered between 2.5% and 3% of GDP, with unclear definitions of what constitutes defense-related spending.
A realignment to reach 5% would mean an additional annual expenditure of between €5 and €6 billion. This raises a simple arithmetic question: where will the money come from? It could either result in immediate cuts to wages, pensions, healthcare, education, or social welfare, or the government would need to borrow more from markets.
Considering that the Greek state borrows only about €6 billion net per year (€8 billion gross), meeting the NATO target without further cutting public spending would require doubling annual borrowing. While possible, it would come at a cost — higher interest rates as markets price in increased demand.
The risk here is twofold: not only would this likely raise Greece’s borrowing costs in an already deteriorating environment due to trade wars, but it could also halt the progress made in improving credit ratings and spreads.
Alternatively, instead of paying off debt early and reducing servicing costs, the government could redirect those funds toward military procurement. Simply put: money for NATO rather than creditors. But such a shift would have consequences, affecting both public finances and private sector borrowing conditions.
Ultimately, the method of financing this increase will likely involve a mix of spending cuts, increased borrowing, and halting debt prepayments — each with negative implications. And this comes at a time when the broader economic environment is already deteriorating globally and particularly in Europe.
What makes this even more problematic is that this NATO-related burden coincides with two major shifts in EU funding crucial to Greece’s budget: the Recovery Fund ends in late 2026, and the current ESPI program concludes in 2027.
All these developments may soon materialize numerically in the upcoming draft Budget to be submitted this autumn — the same document that will frame the much-anticipated announcements expected during the Thessaloniki International Fair in September.