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Bank Of Greece Urges Deal With Creditors As 'Painful' Grexit Seen

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Failure to reach an agreement with creditors can put Greece on the 'painful' path of an exit from the euro and spark an uncontrollable crisis, Greece's central bank warned on Wednesday.

"The conclusion of a new agreement with our partners is of the utmost importance to fend off the immediate risks to the economy, reduce uncertainty and ensure a sustainable growth outlook for Greece," the Bank of Greece said in its annual report.

"Failure to reach an agreement would, on the contrary, mark the beginning of a painful course that would lead initially to a Greek default and ultimately to the country's exit from the euro area and - most likely - from the European Union."

A "manageable debt crisis" would "snowball into an uncontrollable crisis, with great risks for the banking system and financial stability", the bank warned.

"An exit from the euro would only compound the already adverse environment, as the ensuing acute exchange rate crisis would send inflation soaring," it added.

Greece could be plunged into deep recession, causing drastic fall in income levels and surging unemployment, which would erase all the gains the country made during its EU and euro area memberships, the bank said.

"Striking an agreement with our partners is a historical imperative that we cannot afford to ignore," the Bank of Greece said.

Eurozone finance ministers are set to meet in Luxembourg on Thursday. But lawmakers and officials suggest any breakthrough is unlikely that could unlock the EUR 7.2 billion aid for Greece.

Even as both the International Monetary Fund and the European Union claimed progress in talks this month, they also acknowledged significant gaps and recent rhetoric from both sides suggest things have reached a crisis point. The blame game between Greece and creditors has intensified this week and acrimonious remarks came from both sides.

Greek leaders continue to sound defiant with the anti-austerity Prime Minister Alexis Tsipras spewing bitter criticism against creditors in the country's parliament on Tuesday.

Tsipras said the government cannot accept deeper austerity demands and accused creditors of humiliating his country. He also placed 'criminal responsibility' on the IMF for the economic problems faced by Greece.

Meanwhile, European Commission President Jean-Claude Juncker accused Tsipras of presenting twisted versions of the commission's proposals to the Greek public, on matters such as sales taxes.

Earlier this month, Greece decided not to make a payment due to the IMF on June 5 and sought to bundle the four payments due to the lender this month into a single EUR 1.6 billion payment to be made on June 30.

It was the first time during the five-year long crisis that the country delayed a payment to the IMF. If Athens fails to strike a deal with its creditors in June, Greece cannot honor the payment due to the lender, leading to a default.

Things took a turn for the worse over the weekend, after talks between EU officials and Greece broke down as both sides failed to reach an agreement on reforms in areas such as taxes, public finances, pensions, among others.

Last Thursday, an IMF mission left Brussels after failing to reach a consensus with Greece. IMF Managing Director Christine Lagarde is set to speak at a conference in Brussels later today.

The break down of talks between EU and Greece made the risk of a 'Grexit' more real with several European leaders and policymakers warning the same this week.

Austrian Chancellor Werner Faymann visited Athens on Tuesday in a bid to reassure Greece. Europe will be stronger when there is common understanding and "it will be stronger, if we support more those who need solidarity and support at this time", the Austrian leader said.

In other developments, Greece appointed an economics professor Michalis Psalidopoulos on Wednesday as its new representative at the IMF, starting June 29. Elsewhere, Finance Minister Yanis Varoufakis will meet with Secretary-General of the Organisation for Economic Co-operation and Development Angel Gurria in Paris, on his way to the Eurogroup meeting in Luxembourg.

The Bank of Greece said the most serious and direct impact of the prevailing uncertainty in recent months has undoubtedly been the loss of confidence. Greek banks witnessed about EUR 30 billion outflow of deposits in the period October 2014-April 2015, largely in the form of cash withdrawals and hoarding, the bank said.

"Our top priority right now should be to create, as soon as possible, those conditions that would enable the Greek economy to benefit from the favorable global economic environment and the highly accommodative monetary policy at the euro area level and would speed up a sustainable return to global capital markets," the bank added.

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