Mitsotakis wins in Greek election: five questions for markets

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LONDON, May 22 (Reuters) -Greek stocks and government bonds rallied sharply on Monday, cheering the ruling New Democracy party's election showing.

Prime Minister Kyriakos Mitsotakis' party fell just short of a majority in Sunday's vote, making a second election likely.

But with its lead larger than polls predicted, analysts expect New Democracy to win an outright majority in a potential second round. Mitsotakis said he would not form a coalition and hoped for a new election on June 25.

Having previously considered coalition scenarios, markets cheered the lead for Mitsotakis and a disastrous result for the leftist Syriza party under which Greece nearly crashed out of the euro in 2015.

"New Democracy is seen as a reformist party among investors and the economic outlook is more optimistic because there is strong political stability," said Wolfango Piccoli, co-president at financial advisory firm Teneo.

Here are five questions for markets.

1/ What happens between now and the second election?

With no party winning an outright majority in this round, from Monday Greece's president will give the top three parties turns at forming a coalition government.

Without New Democracy, the rest of the parties are unlikely to be able to form a coalition, which would lead to a new election in about a month.

"Mitsotakis has no incentive to seek a coalition government ... as the bonus seats allocated in the second election make ND victory almost sure," said Lorenzo Codogno, head of LC Macro Advisors.

2/ What does the election mean for Greece's return to investment grade?

With three of four of its credit ratings just one notch below investment grade, the election may be the final hurdle before Greece regains the status it lost over a decade ago.

S&P Global has said it could upgrade Greece's BB+ rating within the next year if a new government maintains fiscal discipline and the pace of reforms which unlock EU recovery funds.

Goldman Sachs says delivery of Mitsotakis' plan to roughly triple its spending of EU funds this year could be the "final step" to an upgrade.

Greece's long-term borrowing costs are already below Italy's despite the junk ratings, and an investment-grade rating would drive them lower in anticipation of eventual eligibility for government bond indexes. DE10GR10=RR

Annalisa Piazza, fixed income research analyst at MFS Investment Management, said Greece could gain an investment-grade rating as early as October.

3/ Will investors buy Greek assets?

Greek shares and bonds are big outperformers this year and Mitsotakis' lead boosted them further.

The Athens equity benchmark .ATG advanced over 6% on Monday, climbing to its highest level since July 2014.

The 10-year government bond yield GR10YT=RR dropped to its lowest since December 2022 at 3.89%, a far cry from 2015 when Syriza's victory sent Greek stocks slumping 24% that year and the 10-year yield as high as 19%.

"Knowing the existing government is pro-investment, it's very understandable that equity markets are reacting like this," said Al Alevizakos, managing director, research for AXIA Ventures Group.

4/ What does the election mean for shares?

Greek banks led stock market gains, with National Bank of Greece NBGr.AT, Alpha Services and Holdings ACBr.AT, Eurobank EURBr.AT and Piraeus BOPr.AT all up around 14%.

The potential for a single party government means less volatility than expected, and is also very supportive of Greek assets in the longer-term, said AXIA Ventures' Alevizakos.

That is good news for banks, as the state-owned Hellenic Financial Stability Fund, which owns stakes in each of those names, plans to shed its bank stakes by end-2025.

Greek stocks are up 30% so far this year versus a 9.5% rise for Europe's STOXX 600 .STOXX. Its skew towards banks, boosted by rising interest rates, helps explain the Greek outperformance.

5/ What about the euro?

A trigger for selling the euro in the past, the election is not a big deal for FX traders this time.

"The whole 'peripheral pressures' issue has really gone on the back burner," said Adam Cole, head of FX strategy at RBC Capital Markets.

Greek economy recovers

Will the election impact the Euro?

Greek borrowing costs

Ahead of the pack

Reporting by Samuel Indyk, Lucy Raitano and Harry Robertson in London and Yoruk Bahceli in Amsterdam; Editing by Alison Williams


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