Bundesbank urges Greece to stick by loan terms or face exit

Germany’s Bundesbank said on Wednesday the situation in Greece was «extremely worrying» and it was jeopardizing any further financial aid by threatening not to implement agreed reforms.

In a toughly worded monthly report, the German central bank said Greece would have to bear the consequences of such a scenario, while the challenges that would arise for the euro zone would be «considerable but manageable».

Echoing German political leaders, the Bundesbank warned against Europe easing the conditions for Greece to access aid.

“A significant dilution of exiting agreements would damage confidence in all euro area agreements and treaties and strongly weaken incentives for national reform,» it said.

Greece holds a second election on June 17 after a previous poll produced a parliament split between supporters and opponents of an IMF-EU bailout programme that requires Athens to make deep spending cuts and hike taxes.

Anti-bailout parties are expected to repeat their strong performance, opinion polls show, increasing the risk that Greece will renege on its austerity pledges, default on its debt and possibly leave the single currency.

The Bundesbank said the Eurosystem of euro zone central banks had assumed «considerable risks» by providing Greece with large amounts of liquidity.

“In light of the current situation, it should not significantly increase these risks,» the bank said.

“Instead, the parliaments and governments of the member states should decide on the manner in which any further financial assistance is provided and therefore whether the associated risks should be assumed.”

The bank said it would be crucial to phase out the non-standard monetary policy measures in the future, to contain the risks arising from them such as distorting competition in the banking sector or inciting the delaying of structural reforms.

The Bundesbank said Germany’s economic upswing would continue in the second quarter, driven by construction and consumption, while the manufacturing sector would «probably only make a comparatively small contribution».

“In light of all this, calls on German fiscal policymakers to loosen their fiscal policy stance in order to stimulate the economy appear inappropriate,» the bank said.

“Attempting to kick-start the economy in the short term and putting off consolidation efforts in the long term are not conducive to regaining lost confidence.”