In its October 2014 World Economic Outlook (WEO), the IMF downgraded its Eurozone growth forecast and warned of a 38% risk of a recession. Its pessimism was representative of the consensus at the time but was viewed here as groundless, because monetary trends were signalling an improving economic outlook – see previous post.

In its latest WEO, the IMF raised its 2015 GDP growth forecast to 1.5%. Its estimate of recession risk, however, remains high, at 25% between the second and fourth quarters of 2015. This assessment, on the face of it, is inconsistent with current positive economic and monetary trends.

A likely explanation is that the IMF expects a Greek default and / or EMU exit and views this as a significant risk to the emerging economic upswing.

Concern about a negative shock from “Grexit” probably played a key role in the ECB’s decision to launch QE. The ECB’s economists monitor monetary trends closely and will have recognised the signal of improving prospects in late 2014. The sharp fall in inflation, meanwhile, was clearly due to external commodity price weakness, with the “core” rate – excluding energy, food, alcohol and tobacco – remaining stable. This suggests that ECB President Draghi’s claim of heightened deflation risk, promulgated by useful idiots in the media, was a smokescreen to push through QE, the main purpose of which was to protect other peripheral bond markets from contagion from a Greek default / exit.

The IMF / ECB concerns about the threat posed by a Greek crisis cannot be dismissed. Major defaults are often a harbinger of a sustained deterioration in financial and economic conditions. Such defaults, however, are usually the result of increased borrower stress due to a tightening of liquidity conditions rather than a voluntary decision to repudiate debt.

Current ECB policy is calibrated to deal with a possible financial crisis and is excessively accommodative relative to current economic and monetary trends. If "Grexit" is avoided or its fall-out contained, Mr Draghi’s dismissal of QE tapering is likely to prove “premature”.