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Not what Greece needed.

The Greek economy suffered a surprise contraction at the end of last year, reversing tentative signs of sustained growth and inflicting a fresh blow on the hopes of its international creditors.

Quarterly growth fell by 0.4 per cent in the three months ending in December after a 0.9 per cent expansion recorded in the third quarter, suggesting the country’s stuttering bailout talks are doing nothing to help boost the real economy and belying hopes that growth is finally back on track.

Greece’s EU creditors have championed the return of economic growth in 2016, heaping praise on the Syriza government’s efforts to boost its public finances through higher taxes and reduced spending. Brussels expects the economy to bounce back strongly this year to expand 2.7 per cent from just 0.3 per cent in 2016, contingent on success in its bailout talks.

The International Monetary Fund has however taken a far more pessimistic view on Greece’s growth prospects, arguing that a six-year austerity project has seen it suffer an economic contraction worse than the US Great Depression.

The IMF is now demanding Athens legislate for around €3.6bn in additional tax and pension reforms as its condition to stay involved in the bailout – demands the left-wing government has resisted.

Today’s growth setback is likely to embolden critics within the government who have long argued the economy cannot endure another round of belt-tightening.

In its latest, disputed assessment of the country, the IMF also revised down its long-term economic growth projection to 1 per cent from 1.5 per cent.

Greece’s central bank governor warned yesterday the fragile recovery and troubled banking system was vulnerable to any major setback in bailout talks.

The Greek government is fighting to secure medium term debt relief measures to kick in after 2018 and an inclusion into the European Central Bank’s stimulus programme to lift the economy out of its doldrums after six years of bailouts.

Copyright The Financial Times Limited 2017. All rights reserved.
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