Greece's own central bank is warning the country will painfully crash out of the EU without a bailout

A worker cleans the facade of the Bank of Greece in Athens February 16, 2012.REUTERS/John KolesidisA worker cleans the facade of the Bank of Greece in Athens February 16, 2012.

Greece’s arm of the European Central Bank, the Bank of Greece (BoG), just released an explosive warning about what will happen if a deal isn’t reached on Greece’s bailout.

The central bank thinks Greece could face a “painful” default, an exit of the euro, an eventual exit of the European Union and soaring inflation.

The document, part of the Bank’s regular monetary policy report, will almost certainly add to Greece’s political firestorm. Yannis Stournaras, the governor of the BoG, was previously finance minister under New Democracy, the current government’s primary centre-right opponents.

Greece is in talks with its international creditors over the last portion of the country’s bailout funds, arranged under the previous government. Accessing the €7.2 billion (£5.18 billion, $US8.10 billion) package will give Greece the cash it needs to make the most immediate debt payments.

Without it, all hell will break loose, according to the BoG. Here’s the most important passage (emphasis ours):

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, as the one that we are currently addressing with the help of our partners, would snowball into an uncontrollable crisis, with great risks for the banking system and financial stability. An exit from the euro would only compound the already adverse environment, as the ensuing acute exchange rate crisis would send inflation soaring.

The whole document is pretty damning. Here’s another snippet on the consequences of Grexit (again emphasis ours):

All this would imply deep recession, a dramatic decline in income levels, an exponential rise in unemployment and a collapse of all that the Greek economy has achieved over the years of its EU, and especially its euro area, membership. From its position as a core member of Europe, Greece would see itself relegated to the rank of a poor country in the European South.

The BoG is also pretty stark about its own inability to forecast what comes next, given the uncertainty of the situation. It’s unusual to read a central bank admit that “it is not possible at present to make any safe projections about the future course of the economy.”

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