Cyprus and Greece are more exposed than most European Union economies to the fallout from the Middle East conflict, with tourism and shipping bearing the brunt, credit rating agency Morningstar DBRS has warned.
In a report highlighting the structural vulnerabilities of both countries, DBRS said the escalating crisis is pushing up operating costs across shipping and aviation, squeezing freight rates and dampening tourist flows. Cyprus, the agency said, faces more immediate downside risks because of its geographic proximity to the conflict zone.
The Central Bank of Cyprus has already revised its 2026 real GDP growth forecast down by 0.3 percentage points to 2.7%, based on an assumption that the conflict lasts roughly two months before gradually subsiding. The Bank of Greece now projects 1.9% growth for 2026, down from an earlier forecast of 2.1%.
Shipping rerouted, ports hit
The effective closure of the Strait of Hormuz following US and Israeli strikes on Iran has intensified disruption across global shipping. Tankers and container vessels are altering routes, suspending bookings and absorbing higher security and insurance costs.
Container carriers operating in the Gulf have abandoned hopes of returning to the Red Sea route and are routing ships via the Cape of Good Hope instead, DBRS said. The longer voyages increase fuel consumption, transit times and war-risk insurance premiums, pushing freight rates higher.
The agency warned that if these additional costs persist, shipping companies will face sustained pressure, part of which is likely to be passed on to the market. Prolonged use of the Cape of Good Hope route risks becoming a new normal, with consequences for ports across the Eastern and Central Mediterranean.
Greece’s Piraeus port has already been disproportionately affected, with a notable fall in container throughput as major shipping groups bypass regional transhipment hubs. Cyprus’s Limassol port has also recorded volume losses since 2024, despite efforts to expand its capacity.
Tourism under pressure
Widespread airspace closures over Gulf states have forced airlines to cancel flights, suspend routes and reroute long-haul services, raising flight times, fuel costs and operational uncertainty.
DBRS said these disruptions are feeding directly into international tourism, curbing connectivity and pushing up prices. Although Greece and Cyprus are still considered safe destinations, heightened geopolitical tension has already prompted some travellers to postpone or cancel plans.
Cyprus is additionally exposed through its dependence on specific source markets, including Israel. Early data show a larger drop in travel demand to Cyprus and higher cancellation rates, the agency said, driven by perceptions of elevated risk linked to the island’s location.
Banks resilient but exposed
DBRS devoted particular attention to the banking sector, noting that loans to transport, storage, accommodation and food services account for a significantly higher share of total lending in Greece and Cyprus than the EU average.
Greek banks carry greater exposure to shipping, which is largely internationalised and asset-secured. Rising freight rates and longer sea routes offer short-term support to shipowners’ revenues and debt-servicing capacity. Over time, however, higher fuel and insurance costs — combined with a potential slowdown in trade — could increase credit risk.
For Cypriot banks, DBRS sees more immediate downside risks, primarily because of their higher concentration of lending to the tourism sector. A prolonged decline in tourist arrivals, it said, could hit small and medium-sized enterprises, household incomes and property values, weighing on asset quality.
In Greece, the impact is assessed as more manageable in the near term, given lower bank exposure to tourism and the possibility that the country could attract demand diverted from harder-hit destinations — provided inflation does not accelerate sharply and Greece is not directly drawn into the conflict.
Despite these risks, DBRS noted that both Greek and Cypriot banks maintain strong profitability and adequate capital buffers. Asset quality has improved substantially in recent years, with non-performing loan ratios in key sectors running below the EU average.
Beyond the direct impact on tourism and shipping, the agency warned of secondary pressures through higher energy costs, rising inflation, slower growth and supply chain disruption.
Monetary policy will be a critical variable in the period ahead: interest rate rises aimed at curbing inflation could support bank profitability in the short term but may ultimately weaken loan demand, raise funding costs and erode asset quality.
The duration and any further escalation of the Middle East crisis, DBRS concluded, will be the primary factor determining the scale of the impact on the economies and banking systems of Cyprus and Greece.
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