Greece debt crisis: Recession warning dampens hopes of a return to growth with negotiations set to begin over third bailout

Think-tank says capital controls imposed last month to stop pushing the financial system into collapse will exact a heavy toll across the economy

A team of international inspectors is expected in Athens on Friday to begin negotiating with the government over the country’s third bailout after a second batch of crucial reforms were voted for in parliament despite an ongoing insurgency within the ranks of the ruling Syriza party.

But even as there was hope that the crisis in Greece might be reaching a conclusion, the country’s most influential think-tank warned of a sharp drop back into recession.

In its quarterly report, the IOBE said that capital controls imposed last month to stop a bank run pushing the financial system into collapse would exact a heavy toll across the economy. Reversing a forecast for growth this year of one per cent made as recently as April, it said the economy would contract by as much as two per cent and would remain in recession next year as well.

The Brussels Group, formerly known as the Troika, is a moniker for the technocrats from the European Union and the International Monetary Fund tasked with checking Greece’s reform list. The Greek Prime Minister, Alexis Tsipras, was forced to go back on his pledge of keeping these teams out of Greece as part of the country’s pre-conditions to kickstart negotiations for the agreement.

Despite the widening rift within his own party sparked by the tough austerity measures, Mr Tsipras is expected to focus on getting this deal clinched before 20 August when a €3.2bn (£2.2bn) instalment becomes due to the European Central Bank. He then will concentrate on handling the internal political strife after nearly 40 of his own MPs rebelled against the additional slew of austerity measures. Mr Tsipras held a conciliatory meeting with Syriza politician and parliament’s speaker Zoi Konstantopoulou who lambasted the vote proceedings as “blackmail”.

While Mr Tsipras’s approval rating remains at over 60 per cent, austerity measures imposed by international creditors could quickly overturn this. “We really don’t know what lies ahead with their tactics,” said the owner of a busy café near parliament. “This administration should just get down to work and stop playing with our lives.”

Last time the administration decided to hike prices, the café absorbed the price increase to avoid losing business. But after suffering a €40,000 loss in debt which they’re still struggling to repay, this time the prices will reflect taxation. “Customers understand but it doesn’t mean they’ll keep coming.”