DBRS - PRESSURE ON CYPRUS BANKS, TOURISM AND SHIPPING - Filenews 30/3
Cyprus and Greece appear particularly exposed to geopolitical shocks from the Middle East, as tourism and shipping play a disproportionately large role in the two economies, according to a report by Morningstar DBRS. The agency points out that, despite the recent resilience in growth, the escalation of the crisis increases risks for key sectors of the economy, but also for the banking system.
The report emphasizes that disruptions in shipping and aviation are increasing operating costs and intensifying pressures on both freight rates and tourist flows. Cyprus, due to its geographical proximity to conflict areas, records greater vulnerability, with the agency warning of more immediate downside risks.
More exposed economies due to tourism and shipping
The agency notes that the tourism and shipping sectors are much more important in Greece and Cyprus than in most economies of the European Union. In the case of tourism, its importance is reflected not only in the contribution of accommodation and catering to gross value added, but also in its indirect effects on transport, entertainment, consumption and employment.
DBRS estimates that recent events are likely to negatively affect tourism, which in recent years has been a key driver of growth for both countries. The effect is expected to be more pronounced in Cyprus, as the geographical proximity to the Middle East increases the sense of risk and directly affects the demand for travel.
According to the latest forecasts by the Central Bank of Cyprus, real GDP growth for 2026 has been revised downwards by 0.3 percentage points, to 2.7%, with the assumption that the conflict will last about two months and then a gradual de-escalation will follow. For Greece, the Bank of Greece now estimates growth of 1.9% for 2026, compared to a previous forecast of 2.1%.
Pressures on shipping and trade
The conflict in the Middle East and the effective blockade of the Strait of Hormuz, following the US and Israeli attacks on Iran, have exacerbated the turbulence in shipping. Tankers and container ships are forced to change routes, suspend reservations, and operate with increased security and insurance costs.
DBRS points out that container carriers operating in the Gulf region are turning back to the route through the Cape of Good Hope, abandoning expectations of a return to normalcy via the Red Sea. This development increases distances, fuel consumption and war risk premiums, putting upward pressure on fares.
According to the agency, if these additional costs are maintained, shipping companies will face increased pressures, part of which is expected to be passed on to the market. At the same time, the prolonged use of the route through the Cape of Good Hope tends to evolve into a new normal, with consequences for ports in the Eastern and Central Mediterranean.
In Greece, the port of Piraeus has already been disproportionately affected, with a noticeable decrease in container throughput, as large shipping groups bypass regional trans-shipment hubs. In Cyprus, the Port of Limassol has also recorded volume losses since 2024, despite efforts to boost its capacity.
Aviation and tourism in the spotlight
The escalation of tension has led to widespread airspace closures in Gulf countries, causing serious disruptions to air transport. Many airlines have proceeded with flight cancellations, suspension of routes, and rerouting long-haul flights, resulting in an increase in flight duration, fuel costs, and overall operational uncertainty.
The agency estimates that these consequences are directly transferred to international tourism, limiting connectivity and increasing prices. Although Greece and Cyprus are still considered safe destinations, the increased geopolitical tension has already led some travellers to postpone or cancel their plans.
Cyprus is also highly vulnerable due to its dependence on specific markets, such as Israel. DBRS notes that the first data already show a greater decrease in demand for trips to Cyprus and increased cancellation rates, due to the perception of increased risk due to its geographical location.
Increased risks for banks
Particular reference is made to the banking system, with the agency pointing out that loans for transport, storage, accommodation and catering correspond to a significantly higher percentage in Greece and Cyprus than the average in the European Union.
Greek banks have more exposure to shipping, which is largely internationalized and asset-backed. The increase in freight rates and the lengthening of sea routes offer short-term support to shipowners' revenues and their ability to service loans. However, over time, higher fuel and insurance costs, coupled with a potential slowdown in trade, may increase credit risks.
For Cypriot banks, DBRS sees more immediate downside risks, mainly due to the higher concentration of loans in the tourism sector. A prolonged decline in tourist flows, he notes, could affect small and medium-sized enterprises, household incomes and property values, weighing on asset quality.
In Greece, the impact is estimated to be more manageable in the short term, due to lower banking exposure to tourism and the possibility that the country will benefit from a shift in demand from other more affected destinations, as long as there is no strong acceleration in inflation or direct involvement of the country.
Strong capital, but increased uncertainty
Despite the risks, the agency emphasizes that both Greek and Cypriot banks maintain strong profitability and sufficient capital buffers, elements that offer them resilience in the face of a more demanding environment. In addition, asset quality has improved substantially in recent years, with non-performing loan ratios moving below the European average in key sectors.
However, DBRS warns that in addition to the direct impact on tourism and shipping, the crisis is also creating secondary pressures through increased energy costs, rising inflation, slowing growth and disruptions in supply chains.
Monetary policy, he adds, will be a critical factor in the coming period. Any interest rate hikes to tackle inflation could support banks' profitability in the short term, but in the longer term they may dampen demand for new loans, increase funding costs and weigh on asset quality.
The agency concludes that the duration and possible further escalation of the crisis in the Middle East will be the key factor that will determine the extent of the impact on the economies and banking systems of Cyprus and Greece.
