Eurozone recession warning after Greece deal

Accountancy group Ernst & Young (E&Y) will today warn that the eurozone will tumble into recession if the financial markets react badly to the Greek debt restructuring, adding it would "inevitably raise questions" over the future of the euro.

E&Y will today release its Euro Zone Forecast summer edition, in which it predicts just 1.6 per cent growth in GDP next year. Yet even that could come under pressure if the financial situation in Greece falls apart. The report cautioned that a disorderly restructuring of the country "would plunge the whole euro zone back into recession".

The accountants said the sovereign debt crisis had now "reached a new stage. What was unthinkable one year ago, namely Greece requiring new financial assistance and having to restructure its sovereign debt, is now unavoidable."

Last night, the Greek finance minister was locked in talks with the International Monetary Fund and euro zone finance leaders to secure emergency loans for the country.

Marie Diron, the senior economic adviser to the report, said: "There is still much uncertainty about the impact of Greek debt restructuring on the financial sector and its implications for the eurozone economy as a whole. We could easily tip into a disorderly scenario where eurozone GDP would fall significantly."

Yet a bailout for Greece will only offer short-term relief for the country, Ms Diron said. The accountancy group predicts Greek government debt will rise to 170 per cent of GDP, with interest payments amounting to more than 20 per cent of Government revenues.

Ms Diron added that after Greece, "the EU and IMF will also need further discussion with Ireland and Portugal, thereby undermining any remaining credibility in the conditions attached to their packages."

A disorderly debt restructuring process would see contagion spread not only to Ireland and Portugal, but "core countries via the banking sector," the report said, with restricted credit from the banks and negative confidence from businesses and households.

E&Y forecast that GDP in the so- called PIGS countries – Portugal, Ireland, Greece and Spain – will grow just 1.2 per cent over the next five years, not even half the pace of growth in the pre-crisis decade.