BoG: Deal or painful course out of euro

Bank of Greece Governor Yannis Stournaras on Wednesday issued an emphatic call to the government to reach an agreement with the country’s creditors, saying that otherwise it would pave the way for a Greek exit from the eurozone. In the BoG Monetary Policy report Stournaras also expressed concern about the economy’s return to recession this year, recommending the continuation of the fiscal adjustment with an emphasis on cutting tax exemptions.

“A failure in negotiations would be the start of a painful course that would first lead to bankruptcy and eventually to the exit of the country from the eurozone – and quite possibly from the European Union,” the former finance minister wrote in the BoG report.

“A debt crisis under control, such as the one we are tackling today with the help of our peers, would be transformed into a crisis beyond control, with major risks for the banking system and for credit stability,” Stournaras warned, adding that a Greek exit would turn the country “from an equal member in the nucleus of European states into a poor country in Southern Europe,” with recession deepening, unemployment multiplying and incomes shrinking dramatically.

He noted that there is not much distance left to cover in talks and that the Europeans should fulfill their commitment made in November 2012 to lighten the Greek debt. It is on this and other factors that “the new funding program” should be based.

The central bank expects the economy to either remain stagnant or post marginal growth this year, but only as long as conditions in the economy revert to normality, otherwise there is a danger that “the economy will enter a new recession cycle.”

On the fiscal front, the BoG noted that the budget has stayed on course in the first few months of this year at the expense of the rest of the economy. It further emphasized the importance of abolishing non-targeted tax exemptions that could bring in annual revenues of some 3.6 billion euros.

The report also forecasts an increase in labor cost per unit within 2015 and a further decline in property prices, albeit at a slower pace.