Rebounding bank stocks and the specter of political risk

With an impressive run of +34% since the beginning of July, bank shares have covered the lost ground from May - June. At the same time, however, concerns about political stability and the effects of the energy crisis are growing. 

Taking into account the strong course of the economy, where data shows that the rate of growth this year will exceed even the most optimistic estimates, and the particularly positive results of banks in the first half of the year, shares in the sector bounced, rallying +34% in recent weeks.

Thus, the banking index, in the period 5/7 - 19/8, covered all of the large losses that occurred in the two months of May - June, the drop of which was largely unjustified. According to some estimates, the significant drop between May and June was fueled by the possibility of early elections, which Prime Minister Kyriakos Mitsotakis categorically rejected, a move that relieved investors and contributed decisively to the recovery of the Athens Stock Exchange.

With the economy in flight, supported by the impressive course of tourism and the strengthening of investments, with the help of the Recovery Fund, there is no doubt that 2022, despite the pressures of the war in Ukraine and the energy crisis, will be a great year for banks and the start of a sharp upward cycle after more than a decade of contraction that began in 2010.

This optimism was reflected at the beginning of this year, with the banking index reaching +30% at the beginning of February, which was interrupted by Russia's invasion of Ukraine and the rapid worsening of the energy crisis.

Advantages of the domestic economy and political risk

Despite the concern about the effects of the new crisis on the world economy, the domestic economy had, and still has, important advantages that put it in a strong position and able to achieve significant growth rates in the coming years under one basic condition: political stability.

Political stability is considered a prerequisite for ensuring fiscal balance, recovering the investment grade and implementing reforms.

As mentioned, both the large drop in May-June and the rise in July-August are connected with the holding or not of early elections and the intervention of the prime minister on July 7 may have put an end to the election, however, the phone tapping scandal is shaking the political climate, destabilizing the government and reintroducing political risk. 

Unless all the questions raised about the surveillance issue are answered convincingly and political calm is not restored there is a risk of a protracted, toxic political conflict, given that national elections will be held in 10 months at the latest. A situation that will also affect the equities market.

A possible weakening of New Democracy will create many uncertainties for the country, especially since the new electoral system (with which the second elections will be held) making it more difficult to form a one-party government. In addition, many analysts express their concern that the phone surveillance case has caused a deep rift between K. Mitsotakis and N. Androulakis, making the cooperation between ND - KINAL PASOK very difficult.

Concern has also been expressed about the risk of the government coming under further pressure from the phone surveillance case and responding by upping social benefits that will undermine fiscal stability. Things may become even more complicated in case of new revelations arising and other persons being involved which may further harm Mitsotakis' position.

Thus, the debate in parliament on surveillance, which will probably take place Friday, is also crucial for the market, which hopes that the government's answers will lead to the easing of the case.

In the first phase, however, the stock market recovered all the losses fueled by the resignations, on August 5, of the general secretary of the prime minister and the head of the EYP concerning the phone surveillance case.

However, the continuation will be difficult and will depend on the political developments and the ability of the government to recover its momentum.

The issue of political stability is of vital importance for the country, much more so in a particularly difficult global environment with the energy crisis leading Europe to a breaking point. It is typical that the wholesale electricity price exceeded 500 euros per kilowatt and for today its price has been set at 539 euros.

In comments to Kathimerini, Bank of Greece governor Yiannis Stournaras stressed the issue of political stability and the need for strong governments, warning against a repeat of the mistakes that led Greece to the bailouts. "We must not reverse the correct measures of the memoranda, e.g. in social security, insurance, taxation and fiscal management, which ensured fiscal balance."

He also underlined that Greece today has a great opportunity to take advantage of the debt sustainability conditions, which were secured by the 3 memoranda, and to make the necessary reforms in order to obtain investment grade and achieve growth rates of 3% on average over the next 10 years.

As he emphasized, a condition for the investment grade is "to return to primary surpluses from next year and to accelerate reforms, especially those related to the abolition of bureaucracy in the public sector and investments in the knowledge triangle".