A few years ago, most market pundits believed the local economy and the Athens bourse would have been the prime beneficiaries of Greece’s hosting of the 2004 Olympic Games in Athens. A few months ago, it was clear that the Games had made a positive contribution to economic growth but it was unclear whether the Athens bourse had realized most of the expected benefits from the Games. After the spectacular opening ceremony of the 2004 Olympic Games in Athens last Friday, some have started wondering whether the good times lie ahead after all. Optimism to pessimism and back to optimism, nothing exemplifies more vividly the swings in Greek psychology than the ups and downs associated with the Olympics and their impact on the local economy and bourse. «It came down to the wire, but once again we made it,» a top banker told us yesterday. «All this bad press about security and the completion of major infrastructure works had put us on the defensive even two months ago. However, the opening ceremony convinced me that everything will go smoothly and the Olympics will turn out to be a big boost to the Greek economy and the Athens Stock Exchange in the years to come.» Talking to analysts, brokers and other bankers, one gets the same feeling. A sigh of relief that everything went well, along with hope that the best is yet to come. It is normal. Excessive pessimism seemed to be the rule rather than the exception here not so long ago and it is not unusual to see this giving rise to optimism when concerns about security, the organization of the Games and other related matters start abating. Deficit concerns Nevertheless, a spectacular opening ceremony to the Olympic Games cannot erase concerns about the budget deficit and huge public debt when a major international credit agency such as the Standard & Poor’s warns of a possible downgrade should public finances not be set in order and structural economic measures are not taken after the Olympics. Still, Greece is one of the fastest-growing economies in the EU and the top performer in the eurozone, even as its budget deficit swells to the point of exceeding the 4.0 percent of GDP mark this year. And even though everybody forecasts a slowdown in domestic demand growth next year, no one has forecast a growth rate of less than 3.0 percent. Of course, the Greek economy, partly thanks to EU capital inflows, lower interest rates and a boost from Olympics-related works, has been outpacing average EU growth rate since 1996, but this has done little to help the Athens bourse cure its woes following the bursting of the stock market bubble in 1999-2000. Still, the Athens bourse managed to deliver the second-highest return among all developed markets in 2003, falling just behind Norway but ahead of Germany, based on MSCI data. Some even attributed this development to Games-specific buying by foreign funds ahead of the Games, while others pointed to other reasons, such as the strong growth prospects of the large Greek banks in the medium term and the attractiveness of some other large companies, such as state lottery OPAP and the state-controlled Public Power Corporation. Easing interest? Official figures confirm that foreign funds and other entities had been increasing their equity stakes in local companies, especially large-caps, during this period, but this trend broke in July when foreigners’ participation in the total market capitalization eased to 33.3 percent from 34.4 percent in June. Pressure on Greek large-caps by foreign accounts suggests that foreign holdings may have been trimmed even further this month. It is open to speculation whether these liquidations reflect the unwinding of positions associated with the so-called «Olympic bet» or are due to unrelated causes. These liquidations seem to have taken the luster off the Athens bourse, occupying one of the top return ranks in the national MSCI indexes by mid-June. The MSCI-Greece index, comprising local companies, returned 2.18 percent year-to-August 13, in 11th place among 24 national MSCI indices. Things looked even worse for the small-cap MSCI-Greece index, which was down 7.98 percent year-to-date, not far behind the USA, Japan, Switzerland, the Netherlands and the UK. We must remember that three of four stock markets in countries hosting the Olympic Games outperformed the MSCI World Index during their Olympic years. Australia, the USA and South Korea rose, returning more than the benchmark MSCI index the year they hosted the Games. Spain was an exception in 1992, when Barcelona hosted the Games. It is still early to say whether the Greek bourse will behave more like the Spanish in 1992 or the others. It is safe though to say that assuming the 2004 Olympic Games end as they started and given the low level of expectations, the Greeks may be in for a surprise. Tourism, for example, is likely to pick up and may be 20 to 30 percent higher next year than in 2004. Moreover, one cannot dismiss the possibility of substantially higher foreign direct investment spending, as the corporate tax rate is cut to 25 percent from 35 percent, tax laws are simplified and new incentives for productive investments are put in place at the same time the absence of Olympic outlays and increased EU capital inflows brings the budget deficit below 3.0 percent of GDP. It may be too early and perhaps not prudent to state that the opening ceremony of the Olympic Games has helped turn the pendulum in favor of Greek confidence and self-esteem. It may be even more dangerous to extrapolate to come up with answers about the course of the economy and the bourse next year. Nevertheless, it is obvious to us that optimism has returned and despite all the economic problems that have to be tackled down the road, the economy and the Athens bourse are today in better shape than they were just a few days ago.