Greek banking groups operating on the island can actively support the Cypriot economy, according to Bank of Greece governor Yannis Stournaras.

Speaking to Phileleftheros, Stournaras stressed that Greek and Cypriot banks are entering a period of increased instability from a position of strength, alongside other European institutions.

“I would like to underline that Greek and Cypriot banks, as well as other European banks, are entering this period of increased uncertainty with strong fundamentals,” he said.

At the same time, he pointed to more constrained fiscal conditions across several eurozone economies compared with previous crises.

“In contrast with the previous crisis, and partly because of it, the fiscal starting point in the current environment is less favourable for many significant eurozone economies, implying limited fiscal space,” he explained.

Referring to Greek banks’ expansion in Cyprus, Stournaras said it offers opportunities for revenue diversification beyond the domestic Greek market.

He explained that this expansion enables the development of synergies and the provision of innovative banking and insurance products, particularly targeting high-net-worth clients.

At the same time, he emphasised the broader economic impact. “Greek banking groups can actively support the Cypriot economy by providing financing in key sectors such as shipping, energy and tourism,” he said.

On the structure of the banking sector, he underlined the importance of cross-border mergers and acquisitions for further integration within the eurozone.

He also mentioned that a branch of Revolut is expected to be established in Greece in the near future, reflecting ongoing changes in the European financial landscape.

Turning to geopolitical risks, Stournaras described the war in the Middle East as a major supply-side shock, generating stagflationary pressures.

He explained that this creates a complex challenge for the European Central Bank (ECB).

“The European Central Bank must balance stabilising inflation at its target with avoiding excessive tightening that would weigh on growth,” he said.

In addition, he highlighted the risk of second-round effects, including sustained pressures on wages, prices and inflation expectations.

“At the centre of our analysis is the risk of second-round effects, meaning the entrenchment of pressures on wages, prices and inflation expectations,” he said.

“Our response will depend on the intensity, duration and transmission channels of the shock,” he added.

“If the shock proves temporary and without significant second-round effects, no adjustment of monetary policy will be required,” he said.

Moreover, he outlined alternative scenarios depending on how inflation evolves.

“If it causes a large but not particularly persistent overshoot of the ECB’s inflation target, a measured adjustment will reduce the intensity of second-round effects,” he explained.

“If it leads to a significant and persistent deviation from the target, then the response must be strong,” he added.

Stournaras pointed out that there is currently no clear evidence of a significant pass-through of higher energy prices to inflation, although he cautioned that it is still too early for firm conclusions.

He warned that damage to infrastructure in the Gulf region could prolong inflationary pressures in the medium term, while uncertainty may weigh on investment.

“Uncertainty threatens investment, with negative consequences for growth and long-term potential output,” he said.

“The course of peace talks will be a decisive factor for the decisions of the governing council,” he added.

More broadly, he identified geopolitical uncertainty linked to conflicts in the Middle East and Ukraine as the most significant risk to financial stability in Europe.

“I believe it is still too early to have a clear picture of the transmission channels of the crisis,” he said.

“The duration of the war and the way the conflict is resolved will be key factors determining the impact on the economy and banks,” he added.

Stournaras also warned of potential consequences for the banking sector under adverse scenarios.

“Depending on the scenario, we may see an increase in the flow of new non-performing loans, particularly from vulnerable households or businesses in energy-sensitive sectors,” he said.

“In a negative scenario, I would not exclude an increase in funding costs due to market volatility and a revision of banks’ business plans because of lower demand for new loans,” he continued.

The Greek banking chief also stressed that strengthening resilience and maintaining prudent lending and dividend policies will be essential.

“These will enhance banks’ ability to absorb losses under adverse conditions,” he said.

“I would like to underline that Greek, Cypriot and European banks are entering this period of increased uncertainty with strong fundamentals,” Stournaras concluded.