It was all going (reasonably) well.

After a few days of relative calm for Greece’ two-year bond, the country’s short-term debt has sold off sharply again in the last few hours as Athens’ central bank chief has made series of stark warnings about the economic consequences of the country’s latest bailout impasse.

The yield on a bond maturing in April 2019 has now leapt over 35 basis points to 8.8 per cent but remains below an eight-month high of close to 10 per cent hit last week.

Selling pressure on Greece’s short-term debt had eased on Friday after the country’s bailout monitors in the EU said they were making good headway into bridging their differences with Athens and the International Monetary Fund over the economic reforms and budget targets attached to its €86bn bailout.

A public spat between Brussels and the IMF last week raised fresh concerns over Greece’s ability to secure its latest tranche of bailout cash. The EU has accused the Fund – which has been part of Greece’s bailout talks for over six years – of an unduly grim account of the state of the economy and poured cold water on its claims Greece needs bold debt restructuring and lower budget targets to get back to sustainable growth.

Despite creditors saying they were confident of reaching a compromise at a meeting in Brussels on February 20, comments from Yannis Stournaras, Greece’s central bank governor, warning that a prolonged delay could lead to more austerity measures has put the jitters on the two-year bond.

Mr Stournaras told committee of Greek MPs on Monday that the bailout was at a “critical” stage. Should the impasse continue beyond February – the last month before a series of major European elections – Greece faced a deterioration in its economic conditions and a hit to its banking system, he said.

Greece faces a series of debt repayments in the coming months, with a major €7bn redemption due in July. The government will need an injection of bailout cash to meet its obligations in the summer.

That has hastened the pressure on creditors and Athens to find an agreement later this month. As it stands, the IMF wants the Greek government to legislate austerity measures worth €1.8bn before 2018 and another €1.8bn should it fail to meet its budget targets after the bailout ends in 2018.

“The critical question now is whether the government will accept and be able to pass these measures, or opt for early elections instead”, said Mujtaba Rahman at Eurasia Group. “It’s a very close call”.

In its latest assessment on the eurozone economy released today, the European Commission heaped praised on the Syriza government’s ability to generate better than expected tax revenues – helping boost its primary budget surplus.

The EU expects the Greek economy to accelerate to 2.7 per cent growth this year from 0.3 per cent in 2016. This is contingent on it passing the second phase of its bailout hurdle.

Greece however still lumbers under capital controls on its banking system, with Mr Stournaras warning that the fragile recovery was vulnerable to any fresh bailout shocks.

EU and IMF creditors have long held over-optimistic forecasts on the country’s ability to bounce back to growth after nearly seven years of financial rescues (see chart above).

Figures from the IMF show the country has suffered a downturn worse than the US Great Depression, losing over a quarter of its economic output since 2008.

Bailout monitors are expected to return to the country imminently, with the EU’s economic chief, Pierre Moscovici, adding he would be visiting Athens on Wednesday.

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