Markets have largely underestimated the geopolitical risks in recent months, leading to concerns about a broader regional conflict that could impact the global economy and markets.
Investors are swiftly reducing risk levels, opting for safe havens amidst rising apprehension about oil and gas prices due to uncertainties in the Persian Gulf. The potential closure of the Strait of Hormuz, a key route for 20% of the world’s oil, heightens these concerns.
While analysts predict oil prices may exceed $100 per barrel, they could soar to $120/barrel, potentially reigniting inflationary pressures.
Recent military escalation in the Middle East has pushed oil prices to $77 per barrel this week, marking a 20% increase from two weeks ago and a drop from $82 at this time last year.
The duration and severity of the conflict between Israel and Iran will play crucial roles in determining the impact on the Greek economy during any emerging energy crisis.
Minister of National Economy Kyriakos Pierrakakis emphasized that the situation in the Middle East does not affect the planning of the TIF; however, a closure of the Strait of Hormuz would have dire consequences.
Optima Bank suggests that a $10 increase in oil prices could result in a 0.4% reduction in Greece’s GDP, while a similar rise in natural gas prices could decrease GDP by 0.3%.
The Greek Economy
The Greek economy presents a robust growth narrative, with a “free corridor” for development over the next few years, assuming no further escalations in the Middle East or unforeseen negative geopolitical events. It is poised to be among the first EU countries to register growth in 2025.
Greece’s finances show a strong position, with €43 billion in cash reserves. A turnaround from a deficit of 1.4% of GDP in 2023 to a surplus of 1.3% is anticipated for 2024, marking a significant fiscal achievement over the last 30 years. The primary surplus is projected at 4.8% of GDP, far exceeding budget forecasts.
Moreover, Greece recorded the largest debt-to-GDP ratio reduction within the EU, decreasing by 10.3 percentage points to 153.6% of GDP.
Budget execution remains on track, as the state budget recorded a primary surplus of €5.3 billion in a five-month period, with tax revenues rising by €1.773 billion (7% above target) and spending down by 2.7%.
Estimates from the Ministry of National Economy predict the 2025 budget will conclude with a surplus exceeding 4% of GDP, surpassing €10 billion.
Bonds
Greek bonds have demonstrated remarkable resilience despite a global sell-off in bond markets.
According to analysts, Greece emerged as a key player in the bond market, with Greek bonds rallying last month amid concerns over increasing deficits internationally.
The spread has narrowed to 73 basis points, down from levels of 85 to 90 at the start of the year. The Greek Republic is currently borrowing at lower rates than even Italy, comparable to France. The US 10-year government bond yields 4.38%, while its Greek counterpart offers only 3.317%.
With €43 billion in cash reserves and having met €7.45 billion of its €8 billion annual borrowing requirement, Greek financial staff do not feel pressured to enter the markets, which strengthens bond values.
JP Morgan remains bullish on Greek bonds, highlighting them as a top investment choice due to Greece’s robust macroeconomic performance, favorable outlook, and limited financing needs for the remainder of 2025, allowing the country to observe international developments from a distance while maintaining a stable political environment.
Stock Market – Banks
The crisis has affected the Greek stock market, which saw a +30% rise for GDRs and +60% for banks over the past seven months. The current retreat due to the conflict is deemed controlled. Analysts note that despite this rise, the C.A. remains appealing, with valuations significantly discounted compared to international markets.
JP Morgan identifies Greece and its stock market as presenting significant investment opportunities, particularly when considering the market capitalization relative to Greece’s GDP. With a projected GDP of €240 billion in 2025, the stock market capitalization of €125 billion accounts for just over 50% of GDP.
Investor reactions are becoming increasingly sensitive, indicating a return of volatility.
Greek banks, once seen as a market weakness, are now more resilient. According to Eurobank Equities, despite a rally of over 40% since the start of the year, their valuations remain attractive. While acknowledging increased geopolitical risks, there is room for further earnings upgrades.
Banks’ organic profitability stays strong, with robust credit expansion and positive trends in fees and commissions offsetting the lower net interest income due to a low-interest-rate environment.
Estimates from Alpha Finance suggest banks have around €4 billion in additional capital capacity for future initiatives, with management now appearing more open to considering acquisitions to enhance profitability.
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