Greece faces recession warning as bailout talks set to open

Greece Prepares for Vote on More Measures to Secure Bailout


Greece's most influential think tank warned on Thursday of a sharp drop back into recession in a report that came hours 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 that 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 percent made as recently as April, it said the economy would contract by as much as 2.0-2.5 percent after growing 0.7 percent in 2014 and would remain in recession next year as well.

Photos of Greece's violent protests:

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Greece faces recession warning as bailout talks set to open
Riot police use their shields against petrol bombs lobbed by protesters during an anti-austerity protest on July 15, 2015. Anti-austerity protesters hurled petrol bombs at police in front of Greece's parliament on Wednesday as lawmakers began debating deeply unpopular reforms needed to unlock a new eurozone bailout.Riot police responded with tear gas against dozens of hooded protesters who set ablaze parts of Syntagma square in central Athens. AFP PHOTO/ LOUISA GOULIAMAKI (Photo credit should read LOUISA GOULIAMAKI/AFP/Getty Images)
Masked protesters stand amid tear gas in front of thre Greek parliament in Athens during an anti-austerity protest on July 15, 2015. Anti-austerity protesters hurled petrol bombs at police in front of Greece's parliament on Wednesday as lawmakers began debating deeply unpopular reforms needed to unlock a new eurozone bailout.Riot police responded with tear gas against dozens of hooded protesters who set ablaze parts of Syntagma square in central Athens .AFP PHOTO/ LOUISA GOULIAMAKI (Photo credit should read LOUISA GOULIAMAKI/AFP/Getty Images)
Riot police stand amid petrol bombs threw by protesters during an anti-austerity protest on July 15, 2015. Anti-austerity protesters hurled petrol bombs at police in front of Greece's parliament on Wednesday as lawmakers began debating deeply unpopular reforms needed to unlock a new eurozone bailout.Riot police responded with tear gas against dozens of hooded protesters who set ablaze parts of Syntagma square in central Athens .AFP PHOTO/ LOUISA GOULIAMAKI (Photo credit should read LOUISA GOULIAMAKI/AFP/Getty Images)
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The report underlined the headwinds facing leftwing Prime Minister Alexis Tsipras, who must negotiate a bailout worth up to 86 billion euros 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 European Commission, European Central Bank and International Monetary Fund are due to start in Athens on Friday with the aim of wrapping them up by Aug. 20.

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

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.

Photos of Greece's banks reopening:

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Greece faces recession warning as bailout talks set to open
ATHENS, GREECE - JULY 20: People wait to enter a bank branch as Greek banks reopened on Monday morning after three weeks of closure on July 20, 2015 in Athens, Greece. Many restrictions on transactions will remain and a lot of goods and services will become more expensive as a result of a rise in value added tax (VAT) approved by Parliament last Thursday, which is among the first batch of austerity measures demanded by Greece's creditors. (Photo by Milos Bicanski/Getty Images)
ATHENS, GREECE - JULY 20: People queue to get money from ATMs as Greek banks reopened on Monday morning after three weeks of closure on July 20, 2015 in Athens, Greece. Many restrictions on transactions will remain and a lot of goods and services will become more expensive as a result of a rise in value added tax (VAT) approved by Parliament last Thursday, which is among the first batch of austerity measures demanded by Greece's creditors. (Photo by Milos Bicanski/Getty Images)
ATHENS, GREECE - JULY 20: People wait to enter a bank branch as Greek banks reopened on Monday morning after three weeks of closure on July 20, 2015 in Athens, Greece. Many restrictions on transactions will remain and a lot of goods and services will become more expensive as a result of a rise in value added tax (VAT) approved by Parliament last Thursday, which is among the first batch of austerity measures demanded by Greece's creditors. (Photo by Milos Bicanski/Getty Images)
ATHENS, GREECE - JULY 20: A National Bank official opens the door of a bank branch as people enter after Greek banks reopened on Monday morning after three weeks of closure on July 20, 2015 in Athens, Greece. Many restrictions on transactions will remain and a lot of goods and services will become more expensive as a result of a rise in value added tax (VAT) approved by Parliament last Thursday, which is among the first batch of austerity measures demanded by Greece's creditors. (Photo by Milos Bicanski/Getty Images)
People enter a branch of a national bank in Athens on July 20, 2015. Greek banks reopened after a three-week shutdown imposed to stop mass cash withdrawals crashing the financial system, but citizens woke up to widespread price hikes as part of a cash-for-reform deal with the country's creditors. The shutdown since June 29 is estimated to have cost the economy some 3.0 billion euros ($3.3 billion) in market shortages and export disruption. AFP PHOTO/ LOUISA GOULIAMAKI (Photo credit should read LOUISA GOULIAMAKI/AFP/Getty Images)
People wait to enter a bank on July 20, 2015 in Athens. Greek banks reopened on July 20 after a shutdown lasting three weeks imposed by the government to avert a crash in the banking system over the country's debt crisis. However, capital controls in force since June 29 remain in place, although a daily cash withdrawal limit of 60 euros ($65.03) has now been relaxed to a weekly restriction of 420 euros. AFP PHOTO / ARIS MESSINIS (Photo credit should read ARIS MESSINIS/AFP/Getty Images)
People enter a bank in central Athens on July 20, 2015. Greek banks reopened on July 20 after a shutdown lasting three weeks imposed by the government to avert a crash in the banking system over the country's debt crisis. However, capital controls in force since June 29 remain in place, although a daily cash withdrawal limit of 60 euros ($65.03) has now been relaxed to a weekly restriction of 420 euros. AFP PHOTO/ LOUISA GOULIAMAKI (Photo credit should read LOUISA GOULIAMAKI/AFP/Getty Images)
ATHENS, GREECE - JULY 20: People queue to get money from ATMs as Greek banks reopened on Monday morning after three weeks of closure on July 20, 2015 in Athens, Greece. Many restrictions on transactions will remain and a lot of goods and services will become more expensive as a result of a rise in value added tax (VAT) approved by Parliament last Thursday, which is among the first batch of austerity measures demanded by Greece's creditors. (Photo by Milos Bicanski/Getty Images)
People enter a bank in central Athens on July 20, 2015. Greek banks reopened on July 20 after a shutdown lasting three weeks imposed by the government to avert a crash in the banking system over the country's debt crisis. However, capital controls in force since June 29 remain in place, although a daily cash withdrawal limit of 60 euros ($65.03) has now been relaxed to a weekly restriction of 420 euros. AFP PHOTO/ LOUISA GOULIAMAKI (Photo credit should read LOUISA GOULIAMAKI/AFP/Getty Images)
ATHENS, GREECE - JULY 20: A National Bank official opens the door of a bank branch as people enter after Greek banks reopened on Monday morning after three weeks of closure on July 20, 2015 in Athens, Greece. Many restrictions on transactions will remain and a lot of goods and services will become more expensive as a result of a rise in value added tax (VAT) approved by Parliament last Thursday, which is among the first batch of austerity measures demanded by Greece's creditors. (Photo by Milos Bicanski/Getty Images)
A policeman guards outside of a bank in central Athens on July 20, 2015. Greek banks reopened after a three-week shutdown imposed to stop mass cash withdrawals crashing the financial system, but citizens woke up to widespread price hikes as part of a cash-for-reform deal with the country's creditors. The shutdown since June 29 is estimated to have cost the economy some 3.0 billion euros ($3.3 billion) in market shortages and export disruption. AFP PHOTO/ LOUISA GOULIAMAKI (Photo credit should read LOUISA GOULIAMAKI/AFP/Getty Images)
People wait outside a bank in central Athens on July 20, 2015. Greek banks reopened after a three-week shutdown imposed to stop mass cash withdrawals crashing the financial system, but citizens woke up to widespread price hikes as part of a cash-for-reform deal with the country's creditors. The shutdown since June 29 is estimated to have cost the economy some 3.0 billion euros ($3.3 billion) in market shortages and export disruption. AFP PHOTO/ LOUISA GOULIAMAKI (Photo credit should read LOUISA GOULIAMAKI/AFP/Getty Images)
People wait to enter a bank, prior its opening on July 20, 2015 in Athens. Greek banks reopened on July 20 after a shutdown lasting three weeks imposed by the government to avert a crash in the banking system over the country's debt crisis. However, capital controls in force since June 29 remain in place, although a daily cash withdrawal limit of 60 euros ($65.03) has now been relaxed to a weekly restriction of 420 euros. AFP PHOTO / ARIS MESSINIS (Photo credit should read ARIS MESSINIS/AFP/Getty Images)
Fishmongers man their stalls at Athens' central fish and seafood market on July 20, 2015. Greek banks reopened Monday after a three-week shutdown imposed to stop a run on ATMs from crashing the financial system, but citizens woke up to widespread price hikes as part of a cash-for-reform deal with the country's creditors. Taxes went up on many products and services from sugar and cocoa to condoms, taxis and funerals, from 13 percent to 23 percent. AFP PHOTO/ LOUISA GOULIAMAKI (Photo credit should read LOUISA GOULIAMAKI/AFP/Getty Images)
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SYRIZA REBELS

A senior Greek official said on Thursday that Greece would not reach a one percent primary budget surplus, net of interest rate payments, this year, missing a target agreed with the lenders prior to the imposition of capital controls.

The banks, which would collapse immediately without the ECB's emergency funding, face recapitalization but how much the operation will cost will only be known after banking stress tests due to start in August, the official said.

After debating the bailout reforms in parliament until near dawn, 36 Syriza rebels defied the government, forcing Tsipras to rely on pro-European opposition parties to pass the measure and raising the prospect of a snap election once the deal is sealed.

The rebellion was slightly smaller than in a vote on a first bailout bill last week when 39 Syriza lawmakers dissented. But it confirmed the deep split in the radical leftwing party, which won power in January vowing to end austerity.

State Minister Nikos Pappas, one of Tsipras' closest aides, told the semi-state Athens News Agency that the government would move to complete the bailout negotiations before taking a decision on its next political move.

"Unfortunately, a rupture has been confirmed but I think we will get the procedures for the deal concluded first and then we will look into all these things at the party," he said.

If the talks are not completed in time, European authorities who provided a 7 billion euro bridging loan to allow Athens to meet debt repayments this week, may have to provide further temporary financing. European Economic Affairs Commissioner Pierre Moscovici said that a change in the rules governing the EFSM, an EU fund that was used to provide the first bridging loan, would enable the fund to be used for a second loan. The new rules provide a guarantee to non-euro member states which had been concerned that the fund, intended for the full 28-member EU rather than the narrower group of countries in the single currency, was being diverted to bailout the euro.

(Additional reporting by Lefteris Papadimas and Costas Pitas, Writing by James Mackenzie; Editing by Peter Graff)

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