By Jan Strupczewski

Greece is likely to return to economic growth around the middle of next year if the government makes a serious effort to regain financial stability, European Vice President for the euro Valdis Dombrovskis said.

After years of recession, Greece's economy started growing again by 0.8 percent in 2014 and the European Commission expected it to expand by 2.5 percent this year, but a rejection of agreed reforms by the left-wing government of Alexis Tsipras plunged the country back into recession.

"We were forecasting 2.5 percent growth in Greece this year, now we expect a 2.0-2.5 percent recession," Dombrovskis told Reuters on the sidelines of the International Monetary Fund's meetings in Lima.

But Greece could quickly return to growth if the government ensures financial stability, because all the fundamentals are there, Dombrovskis said.

"If the government works seriously to regain financial stability, it can return to economic growth," he said.

"Our current forecast is that next year as a whole it will still be a mild recession, but already during next year, on a quarterly basis, in the second half of the year, Greece will return to year-on-year growth," Dombrovskis said.

"If the economy gets back on track, there can be also some positive surprises in terms of performance, because the Greek economy is now substantially below potential and you can catch up to the potential quite quickly," he said.

The economic growth rate will also have an impact on Greece's debt servicing ability, as its euro zone creditors are considering debt relief through capping its gross debt servicing costs at a maximum of 15 percent annually.

Dombrovskis said that Greece's net debt servicing costs, which exclude debt rollover, were only 4 percent of gross domestic product a year, less than Portugal's or Italy's.

Greece's Finance Minister Euclid Tsakalotos said on Tuesday he expected the economy would suffer a less severe recession this year than its international lenders assumed in drafting the country's new bailout programme.

He gave no figures, saying only the draft 2016 budget announced on Monday had stuck to the bailout assumptions of a 2.3 percent economic contraction this year followed by a 1.3 percent shrinkage in 2016 before growth resumes in 2017.

"Our projections for the third quarter are much better than the projections that we had in August. That is what led the prime minister to say yesterday that we can return to growth (in the second half of 2016)," he told parliament in a debate on the government's four-year programme.

"We could not include that in the draft budget yesterday because we don't have the official projections for the third quarter but it's an estimate. We feel that we have persuaded the institutions that the results will be better so we can be more optimistic," he said.

source: Reuters