* ECB's Provopoulos: Greek bank sector has enough capital
* Says central banks could sell bonds to stabilisation fund
* Break-up of euro zone is "absurd" notion
(Adds details, combines stories)
FRANKFURT/ATHENS, June 21 (Reuters) - Greece's banking sector had sufficient capital at the start of the crisis to see it through recent upheavals, European Central Bank Governing Council member George Provopoulos was quoted on Monday as saying.
In an interview published in the Wall Street Journal, Provopoulos also suggested the ECB could sell government bonds bought under its new purchase programme to the 440 billion euro fund set up to ensure financial stability in the euro zone.
The Greek central bank chief said he expected bad loans to rise over the next two years, potentially putting pressure on smaller Greek lenders.
"Our analysis suggests that NPLs (non-performing loans) will peak early in 2012. We will start seeing clear signs of improvement in 2013 and thereafter," he told the paper.
"At the start of the crisis, our banking system had a capital buffer of well over 10 billion. Our stress tests and simulations indicate that this buffer is fully sufficient to cover any potential erosion of the capital base for the system as a whole. Of course, not all banks are the same or face similar shocks, so one cannot exclude the possibility that some banks, especially smaller banks, may need support."
The European Union will stress-test European banks to gauge how well they would withstand slower growth and pressure on sovereign debt holdings. [ID:nLDE65H1RP]
In a speech to an economic conference in Athens, Provopoulos rejected the idea of the euro zone breaking up as "absurd".
He said he was confident that Greece would emerge stronger from the current crisis after support from the European Union, ECB and International Monetary Fund.
"Some market analysts are of the opinion that Greece's debt dynamics are unsustainable. They are wrong," he told the Onassis Foundation event.
"The combination of factors comprising the support programme -- fiscal discipline, liberalisation of markets, privatisations, and measures to increase the efficiency of the bureaucracy -- will contribute to confidence ... and boost competitiveness and economic growth," he said.
"(The support package) will set-off positive growth dynamics that will, among other things, lower the debt-to-GDP ratio. The growth potential of the Greek economy is enormous. It is my firm belief that the present crisis will prove to be the catalyst that will reshape the economy."
ECB COULD SELL GOVERNMENT BONDS
In the WSJ interview, Provopoulos said euro zone central banks should consider selling government bonds bought under the purchase programme to the euro zone's new stabilisation fund.
"Once the transmission mechanism is restored, the issue of what to do with the securities purchased could be addressed, especially in light of the fact that the Securities Markets Program is temporary," he said.
"Although the issue whether the EU Stabilization Fund would be able to purchase the debt obtained by the ECB under the Securities Markets Program is not foreseen under the provisions of the Stabilization Fund, the idea merits further consideration."
The ECB has previously floated the idea of selling bonds bought under the purchase programme -- more than 47 billion euros to date -- back to banks, but has not said what it will do with the bonds.
Provopoulos said the ECB would wind back its extra liquidity measures as soon as it was appropriate to.
"You can be sure that we will exit those measures in a timely fashion in line with improvements in the functioning of the markets. We will never lose sight of our primary mandate of ensuring price stability over the medium term," he said. (Reporting by Krista Hughes in Frankfurt and George Georgiopoulos in Athens, editing by Mike Peacock)