ECB's Nowotny backs longer Greek aid repayment

VIENNA/FLORENCE, Italy Tue May 10, 2011 9:04am EDT

European Central Bank Governing Council member and chief of Austria's central bank Ewald Nowotny talks during an interview with Reuters in Vienna March 14, 2011. The European Central Bank's ''strong vigilance'' message on tackling inflation is still relevant even though global economic uncertainty has increased, ECB policymaker Nowotny said on Monday. REUTERS/Heinz-Peter Bader

European Central Bank Governing Council member and chief of Austria's central bank Ewald Nowotny talks during an interview with Reuters in Vienna March 14, 2011. The European Central Bank's ''strong vigilance'' message on tackling inflation is still relevant even though global economic uncertainty has increased, ECB policymaker Nowotny said on Monday.

Credit: Reuters/Heinz-Peter Bader

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VIENNA/FLORENCE, Italy (Reuters) - A Greek debt restructuring would have dire consequences, ECB policymakers warned, with one suggesting the bank would be unlikely to help the euro zone recover from the shock by delaying interest rate hikes.

Ewald Nowotny, one of three members of the European Central Bank to voice opposition on Tuesday to a restructuring, said he favored giving Greece more time to repay its aid rather than issuing new loans.

"You have to be aware that this would immediately have massive consequences for the Greek banking system and for the banking system overall," Nowotny told Austrian radio. "That would only heighten the crisis."

Asked whether Greece would get extra aid, Nowotny said: "It does not have to be fresh loans. It could also be a question of the time horizon of how long one has to repay," noting that Greece had to repay 25 billion to 30 billion euros next year.

Greek officials said earlier the country wants international lenders to ease the terms of a 110 billion euro bailout and get fresh funding to avoid a default.

After a new credit rating cut, by S&P, made an early return to markets even less likely, Greece denied on Tuesday a Dow Jones report that it expects a new aid package of nearly 60 billion euros ($85.7 billion) to deal with the crisis.

ECB heavyweight Lorenzo Bini Smaghi said a default or restructuring would be a disaster for those in the country. "I would call it political suicide -- which leads many into poverty, as experience has shown," he said in a speech in Florence.

Nowotny and Bini Smaghi both said a debt restructuring would damage Greece and other countries in the 17-member euro zone. Nowotny said it was primarily up to Greece to put its financial house in order but a restructuring must be avoided.

"I cannot understand the idea on the other hand of making more aid conditional on some kind of debt restructuring of the country receiving aid," which would produce "perverse behavior," Bini Smaghi said.

Asked about the fact that many in Germany were pushing for a Greek restructuring he said: "It is a self-harm position because the main creditors are in Germany."

Another ECB policymaker, Juergen Stark, said the program Greece agreed a year ago with international lenders in exchange for a bailout was realistic and must be implemented.

"Greece has a high debt level, but Greece is not insolvent," said Stark, a member of the ECB's Executive Board which runs the central bank's day-to-day business.

RATE HIKE WARNING

Another ratesetter, Gertrude Tumpel-Gugerell, hinted there would be little help for Greece from the ECB in terms of delaying euro zone rate hikes.

After the bank effectively closed the door on a June rate hike last week, economists now believe the ECB will raise euro zone interest rates to 1.5 percent in July and follow up with another hike later in the year.

"A delayed exit from accommodative monetary policy after a recessionary period may contribute to excessive risk-taking and large international capital flows," Tumpel-Gugerell said.

"Similarly, exiting too late from stimulative fiscal policy may run the risk of triggering an adverse adjustment in global asset prices and global exchange rate configurations," she added.

In Vienna, Nowotny also criticized a secret meeting of a select group of countries from the bloc last Friday, the existence of which leaked out.

He said an official meeting of top euro zone officials planned for May 16 would have been the proper venue to discuss Greece's problems.

"This (May 16) meeting and this group is the one that really decides such things. I think the improvised meeting of last Friday was unfortunate. It had only negative effects. It is important to return to orderly, serious negotiations."

(Attribution in paragraphs 9, 10 was corrected in this story)

(Writing by Marc Jones and Paul Carrel; additional reporting by Sakari Suoninen in Helsinki and Stephen Jewkes in Milan; Editing by John Stonestreet)

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