Interest rate as a determinant of fiscal sustainability in the Southeast European region

This paper analyzes the impact of the interest rates on public debt sustainability in Southeast European countries during the 2008-2024, using a panel of eight countries with a total of 136 annual observations. The methodological approach is based on panel regression models (OLS, FEM, and REM), accompanied by diagnostic tests for autocorrelation, multicollinearity, and heteroskedasticity. Due to the presence of autocorrelation and heteroskedasticity, the pooled OLS model with robust standard errors was selected as the most reliable specification. The results show that the interest rate is by far the most significant determinant of public debt: an increase in the average interest rate by one percentage point raises the debt-to-GDP ratio by approximately 6.9-7.3 percentage points. Real GDP growth and the primary balance are not statistically significant, while inflation exhibits a mildly negative effect on debt, which becomes more pronounced with time lags. The originality of the paper lies in the empirically isolation of the interest rate effect in a region characterized by post-transition structural legacies, limited fiscal capacities, post-crisis instability, and pronounced pressures on public finance sustainability. This provides a new empirical interpretation of debt sustainability, according to which the cost of borrowing is the key mechanism shaping the debt trajectory-stronger than either fiscal consolidation or economic growth. The findings carry important implications for fiscal policy design: stabilizing public debt requires reducing refinancing risk, extending bond maturities, strengthening credibility, and controlling exposure to changes in the international interest rate environment and heightened market volatility.