by Maria Spiliopoulou

ATHENS, July 2 (Xinhua) -- The debt relief deal agreed by eurozone finance ministers last month can be expected to contribute significantly to Greece's smooth return to the markets and the continuation of the reform effort, a central Bank of Greece (BoG) report released on Monday said.

BoG governor Yannis Stournaras submitted the 2017-2018 monetary policy report to Parliamentary Speaker Nikos Voutsis and the government, expressing optimism about the prospects of the economy as it is ready to exit the bailout programs in August after eight years.

However, the report underlined that challenges remain. According to an e-mailed press release, Stournaras stressed during his meeting with Voutsis that more work remains to be done to ensure that the sacrifices made by Greek people over the past eight years of the financial and economic crisis will bear more fruit.

"The sustainable return of the Greek state to the international sovereign bond markets will be the ultimate and definitive proof that the economy has overcome the crisis. Any other outcome would undermine the growth prospects and give rise to serious problems," the e-mailed report said.

"As shown by the recent political crisis in Italy and the ensuing increase in Greek government bond yields, the Greek economy is still vulnerable, as a sharp increase in the cost of borrowing could derail both the economic recovery and debt servicing costs," BoG noted.

Thus, in order to bolster market confidence, Greece must continue with the implementation of reforms, especially those concerning public administration and the strengthening of independent institutions, the report read.

Greece's central bank welcomed the recent Eurogroup decision because it "provides for enhanced post-program surveillance and conditionality, to ensure that fiscal policy does not go off-track and that the reform effort is not abandoned."

In addition, it stressed that "it ensures the sustainability of Greek public debt, at least in the medium term, which will have a positive impact on the markets and boost confidence in the future of the Greek economy."

However, the report warned that "long-term sustainability hinges crucially on maintaining the fiscal and reform effort over a long period, as well as on the commitment of the Eurogroup to consider further debt relief measures for the long term in the event of an unexpectedly more adverse scenario."

The central bank and BoG's analysts also underlined that the Eurogroup agreement envisages primary surpluses of 3.5 percent of gross domestic product (GDP) until 2022 and 2.2 percent of GDP on average in the period from 2023 to 2060.

Following the June 21 deal, the European Central Bank (ECB) "could consider keeping the waiver on Greek government bonds in place, so that the latter remain eligible as collateral in euro system monetary policy operations; and to allow for their inclusion in the ECB's asset purchase program," BoG argued.

In order to secure such a decision, which "would lower borrowing costs for the state and banks", BoG again suggested the establishment of a precautionary credit line.

The government promotes the option of a large cash buffer instead, but BoG insisted Monday that the buffer "weighs heavily on public debt and on government financing costs."

According to Bank of Greece estimates, economic activity is expected to pick up in the medium term, with GDP growth projected at 2 percent and 2.3 percent, respectively, for 2018 and 2019.

But the growth outlook is surrounded by considerable uncertainties, the report warned. Among the domestic risks, delays in the implementation of reforms and privatizations, combined with excessive taxation, could slow down the recovery of the economy, it said.

The risks arising from the external environment are mainly associated with an increase in trade protectionism worldwide, geopolitical developments, but also the risk aversion of investors as a result of financial market turbulence, the central bank said.

Finally, any deterioration in the refugee crisis and increase in refugee flows could pose downside risks to the economic outlook, it warned.