Greek think-tank in recession warning

Greece’s most influential think-tank has warned of a sharp drop back into recession in a report that came after parliament approved a second package of reform measures aimed at securing a new bailout from international lenders.

In its quarterly report, the IOBE institute said capital controls imposed last month to stop a bank run pushing the financial system into collapse would exact a heavy toll across the economy.

Reversing a forecast for growth this year of 1% made as recently as April, it said the economy would contract by as much as 2% to 2.5% after growing 0.7% in 2014 and would remain in recession next year as well.

The report underlined the headwinds facing leftwing prime minister Alexis Tsipras, who must negotiate a bailout worth up to €86bn with sceptical lenders, while struggling to hold his divided Syriza party together.

While his own personal popularity is high, a renewed drop into recession after a modest recovery last year would test his government’s ability to push through the tough mix of tax hikes, spending cuts, and economic reforms demanded by the lenders.

Formal negotiations with officials from the troika are due to start in Athens today with the aim of wrapping them up by August 20.

But already there have been doubts about whether the severely weakened economy can support the new cuts after a six year-long slump that has cut national output by a quarter and sent unemployment over 25%.

Banks have re-opened after the ECB restored emergency funding last week but capital controls remain in place, hobbling companies that deal with suppliers outside Greece and highlighting the fragile state of the financial system.