A failure by Greece to reach an agreement with creditors could plunge the country into another "major recession," undermining the improving outlook in Central Europe, the European Bank for Reconstruction and Development (EBRD) said on Thursday.
The chances for the Greek government and its main creditors of resolving the impasse remain unclear, the London-based institution said in its latest economic forecast issued a day after official figures showed Greece had slipped back into recession following months of positive growth.
The Greek economy, which grew by 0.8 percent in 2014, would show zero growth this year and expand by two percent in 2016, provided Athens reaches an agreement with eurozone countries and the International Monetary Fund (IMF) to unlock the international loan's last tranche of 7.2 billion Euros ($8.2 billion), the EBRD said.
But "these forecasts would be rendered completely invalid in a negative scenario" the EBRD said in the report published during its annual meeting held in the Georgian capital Tbilisi.
According to the report, "Greece would likely fall back into a major recession, the size and duration of which are difficult to quantify now," if it misses sovereign debt payments and introduces capital controls, limits on deposit withdrawals, and virtual currency to pay domestic obligations.
Over the last six years, Greece lost a quarter of its gross domestic product in a recession rooted in the 2008 global financial crisis.
The country's economy started to recover last year and registered three consecutive quarters of positive growth before contracting by 0.4 percent in the last quarter of 2014 and 0.2 percent in the first quarter of 2015.
"Business confidence has been badly hit by widespread fears that Greece may default on its external debt obligations and perhaps, in an extreme scenario, even exit the eurozone," the EBRD said in the first ever forecast provided for Greece, where it started working in March 2015.
It added that any volatility related to Greece would dampen positive trends in Central Europe and the Baltics (CEB), where growth forecasts were revised up thanks to the stimulus from the Eurozone monetary easing the positive impact of falling oil prices.
The EBRD said it sees economies in the CEB region expanding this year by 2.9 percent -- against previously predicted 2.6-percent growth -- and by three percent in 2016.
It said the region's best performers would be Poland, Hungary, Slovenia, and Slovakia whose economies are expected to grow by 3.4 percent, 2.6 percent, two percent, and 2.8 percent respectively.
Founded in 1991, the EBRD is an international financial institution owned by 64 countries, the European Union and the European Investment Bank.
It was initially focused on building market economies in the former communist states in Central and Eastern Europe and currently supports development in 30 countries in Central Europe and Central Asia as well as in five countries in the Middle East and North Africa.