A day after the IMF approved a 28 billion euro bailout loan for Greece, part of a broader 130 billion euro rescue package by European partners and the European Central Bank, an IMF staff report warned that Athens had no space for error as it pushes through economic reforms and spending cuts to tackle its high debt levels.
The IMF said any policy delays or a slow response by the economy to reforms would lead to a deeper recession and a worsening debt profile in Greece.
In addition, there are also political risks tied to elections in Greece this year, which create more uncertainty, the IMF added.
"The materialization of these risks would most likely require additional debt relief by the official sector and, short of that, lead to a sovereign default," it said, adding: "In the absence of continued official support and access to ECB refinancing operations, a disorderly euro exit would be unavoidable, heightening risks to the Fund."
The IMF said if Greece were to leave the euro, there would be economic costs and contagion risks to the rest of Europe, and possibly the world.
It said if Greece were to leave the euro, currency depreciation and monetary financing of deficit spending would push up inflation, followed by strong upward pressure on wages and other production costs, quickly reducing any competitive advantages.
The Fund said bank solvency in Greece has become "an acute problem" and the recession was taking its toll, with non-performing loans at 14.7 percent of total loans at the end of September 2011. Greek banks have lost close to 30 percent of their deposit base, the fund added.
Preliminary IMF staff estimates for different stress scenarios see Greek bank loan losses over a three-year period in the range of 30 to 35 billion euros, the report said.