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Greek stocks soar as they shed the ‘problem child of Europe’ label

Tourists outside the Athens Academy building in Athens, Greece, Monday, May 22, 2023. Greek Prime Minister Kyriakos Mitsotakis defeated his opposition in national elections on Sunday, closing in on another four-term term years and driving markets higher on the prospect that the Prime Minister’s pro-investment policies will continue.

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Greek stocks posted big gains on Monday after a national election that saw the ruling party win a surprisingly large share of the vote.

The 40.8% victory of the New Democracy party, beating the 20.1% of the left-wing party Syriza, second, still left it short of a parliamentary majority. A new vote is scheduled for June 25, in which New Democracy is the favorite to secure a victory under electoral rules that will see the party gain 50 more parliamentary seats, if it wins more than 40% of the vote again.

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When the outcome became clear earlier in the week, stocks measured on the Athens Broad Composite Index jumped nearly 7% and edged higher on Tuesday, despite pessimism in global equity markets.

The strong daily move was partly due to the fact that the Greek market is “small and shallow” and traders had factored in the potential for a three to four party coalition that could create instability, said George Lagarias, chief economist at Mazars Wealth Management.

It nevertheless takes the index’s gains to almost 30% in 2023 so far and over 40% over the past year, trading close to levels of around 10 years ago – making says more about Greece’s reforms and its economy than short-term bets, Lagarias added.

“The current government is seen as business-friendly,” he said, and investors now expect stability is likely to come from a comfortable majority.

There are several key ways to ensure that image while serving in government under Prime Minister Kyriakos Mitsotakis since 2019, economists and analysts told CNBC.

Political stability, reforms and Covid stimulus funds behind Greece's growth, analyst says

The first was to take significant steps to improve Greece’s outdated bureaucratic systems in areas such as taxation, speeding up and modernizing systems for individuals and businesses.

Several economic successes have also caught the eye: the early repayment of IMF loans to Greece, a high but declining debt-to-GDP ratio, a sustained increase in employment and deposits, consumption and corporate income .

Greek economic growth was 5.9% in 2022, well above the eurozone rate of 3.5%, and is forecast at 2.2% by the Greek central bank in 2023, according to Reuters. This week, the country’s 10-year bond yield hit a 24-year low against Italy, suggesting lower risk.

Greece’s central bank is also eagerly awaiting a hoped-for upgrade of its economy from junk to investment grade, which Goldman Sachs says is “on the verge” of receiving.

Greek Finance Minister: We expect a much stronger 2023

These developments were cited by Kostas Kondakis, Chief Investment Officer at Piraeus Asset Management, who said that “the successful implementation of macroeconomic policy with an impressive fiscal adjustment strategy” had caught the attention of international investors and reduces the perception of risks around Greek assets. He added that a key feat of the current government has been to achieve a budget surplus through increased revenue collection, fulfilling a long-standing goal of its predecessors.

Kondakis noted that alongside the percentage gains, average daily volumes in the stock market rose 38.7% year-over-year, indicating a return of overseas investors.

“Keep in mind that equity valuations are still 30% below the eurozone average, with higher growth prospects and healthy earnings and free cash flow. Greek companies have learned a lot after a decade of crisis,” he said. .

The next step, although potentially not imminent, will be the upgrade of the Athens Stock Exchange from emerging to developed, he added – although it needs reforms, including a higher free float and to attract higher volumes and bigger companies.

‘Problem Child’ is no more

Mazars’ George Lagarias also said that New Democracy had succeeded in changing perceptions of Greece abroad, despite the headwinds of the pandemic and with serious problems lingering in the form of a cost of living crisis. and many people living below the poverty line.

“Greece is no longer Europe’s problem child, quite the contrary. They have managed to change the image of Greece from a problem child to a paragon of reform,” he said.

In addition to enacting domestic reforms, the government has increased Greece’s geopolitical stature, Lagarias said. This has included positioning itself as a staunch member of NATO, while its neighbor Turkey has clashed with the bloc over Finland and Sweden joining.

Strengthening diplomatic alliances can have a significant economic impact in an era of “supporting friends,” when countries seek to shift supply chains to their allies, Lagarias added.

If he wins re-election, Mitsotakis will likely continue a similar agenda, said Paolo Pizzoli, senior economist at ING Bank, “benefiting from a sustained reopening effect that propelled growth into 2022.” Political stability should also be positive for Greece’s budget, especially as the pandemic and energy support programs wind down.

Tourism will act as an engine of growth in the short term, but the impact of high inflation on real disposable income will affect private consumption, and higher interest rates could impact fixed capital formation, warned Pizzoli.

Falling bond yields and equity gains “will only prove sustainable if Greek economic growth does not disappoint”, he said.


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