Germany's central bank says the current situation in Greece is extremely worrying, according to its monthly report released on Wednesday. The Bundesbank fears that Athens might go back on the terms of its bailout.

"Current developments in Greece are highly alarming," the report emphasized. "Greece is threatening not to implement the agreed reforms and consolidation measures in return for extensive aid, and this could jeopardize the continuation of the aid, with Greece having to bear the consequences."

The Bundesbank added that if such a scenario came about, the challenges for the euro area and Germany in particular would be substantial, but manageable via "careful crisis management" and coordination with eurozone partners.

Mutual trust at stake

The bank also warned Greece not to water down its previous austerity course as demanded by the country's far left around party leader Alexis Tsipras. The Bundesbank maintained such a move would completely ruin any confidence in Greece's ability to meet its obligations. It would also lessen any incentives for Greece to take budget consolidation seriously in the years ahead.

Also on Wednesday, Germany's central bank managed the sale of two-year treasury notes which drew strong demand and were sold at zero interest for the first time.

While many eurozone nations have seen their borrowing costs soar as the debt crisis lingers, Europe's biggest economy has been enjoying record-low interest rates on its sovereign debt as investors regard it as a safe haven amid an otherwise highly risky environment.

hg/ng (dpa, AFP)