Greece has one last chance to stay in the euro zone and needs an all-out effort to avoid being dragged back several decades, the country's central bank warned on Wednesday.
In a blunt snapshot of the country's precarious position, the Bank of Greece said failure to hit fiscal targets, delays in implementing reforms and a shrinking economy had undermined its earlier assessments on Greece's debt being sustainable.
A euro zone bailout deal agreed in late October may well be the last such opportunity given to Greece, it said.
The country must avoid any further delays or deviations from targets at all costs; indeed, every possible effort needs to focus on overshooting the targets, the bank said in its interim monetary policy report.
The present juncture is the most critical period in Greece's post-war history. What is at stake is whether the country is to remain within the euro area.
It predicted the economy would contract by about 5.5 percent or more in 2011, followed by a 2.8 percent fall in 2012 before returning to growth in 2013.
Unemployment will near 17 percent this year, and could top 18 percent next year, it said.
The initial trigger for the euro zone debt crisis, Greece is struggling through its fourth year of recession and risks bankruptcy without its next tranche of bailout money. Exasperated European partners have warned it is up to the country to prove it deserves to stay in the euro zone.
New Prime Minister Lucas Papademos has promised to implement reforms, but faces lukewarm support from major political parties and strident opposition from unions angered by a fresh round of austerity measures.
The situation remains critical, the Bank of Greece wrote. Thus far, the pace and degree of policy implementation have failed to convince both the markets and the general public that Greece is on the road to achieving the goals set.
The dire language used by the Bank of Greece in its interim report reflected the higher stakes involved, said Jonathan Loynes, chief European economist at Capital Economics.
It's a ratcheting up of the language used previously, both by the Bank of Greece and more generally, Loynes said.
It does reflect a growing acceptance on the part of institutions and policymakers that countries like Greece may well leave the single currency.
The central bank also warned that Greek banks urgently needed to strengthen their capital base and that a substantial recapitalisation of the banking system is necessary.
It said it had been providing exceptional funding since August to lenders to compensate for deposit withdrawals and a decline in the value of collateral eligible for monetary policy operations.
Greece now must generate primary surpluses and speed up an economic recovery to pull itself out of the crisis, the central bank said.
(Reporting by Deepa Babington and Harry Papachristou; editing by Ron Askew)