* ECB's key mandate price stability
* Sees no Greek restructuring, "very bad idea"
* Greece made progress on austerity programme
By Michele Kambas
NICOSIA, April 27 Further increases in euro zone
interest rates may be warranted if the inflation outlook
deteriorates further this year, ECB policymaker Athanasios
Orphanides said on Wednesday.
Orphanides, who heads the Central Bank of Cyprus, also
dismissed rising speculation of a Greek debt restructuring as a
"very bad idea" which, if adopted, ran the risk of spilling into
other euro zone countries and beyond the 17-member bloc.
"If the picture we have of inflation in the euro zone
deteriorates from what we have seen in the past few months then
certainly more adjustment would be required because our primary
target is price stability in the euro zone as a whole,"
Orphanides told a news conference in Nicosia.
The European Central Bank raised its main refinancing rate
by 25 basis points to 1.25 percent earlier this month on the
back of rising energy and food prices, marking its first hike in
almost three years. The market is pricing in the next euro zone
rate rise by July at the latest.
Orphanides, a member of the ECB's Governing Council, said
updated ECB staff projections in coming weeks could give a gauge
of inflationary expectations.
"We in the ECB are sensitive to the uncertainty which is
around us and that is why we are very careful.
"If the picture of inflation is such which warrants a
further adjustment upwards then that will happen because our
primary target is known. If however that is not necessary, and
that will be seen in the next few weeks, then further
adjustments will not be required."
NO GREECE RESTRUCTURING
The head of the world's biggest bond fund, writing in the
German daily "Handelsblatt" on Wednesday, said Greece is far
from stabilising its finances and should restructure its
sovereign debt. [ID:nLDE73Q0O4]
"So far none of the solutions for the Greek debt crisis have
worked. And a lot of people - including me - don't believe that
they will work in the future," wrote Mohamed El-Erian, chief
executive of Pacific Investment Management Company (PIMCO).
But Orphanides praised Greek progress in implementing an
austerity programme under the terms of its 110 billion euro
($160 billion) bailout by the European Union and International
"A restructure would be wrong. It would be undesirable for
the Greek economy, for the economy of the euro zone, unnecessary
and it is just a very bad idea," Orphanides said.
"...It would have a chain negative reaction on other
economies of Europe, possibly beyond the euro zone," he said.
"It is certainly not recommended that the Greek government
examine such a possibility, and certainly not for politicians in
the EU to discuss this or make comments (to this effect)."
Markets remain wary that Greece will have to resort to some
form of debt relief, reflected by record high yield premiums on
Greek government bonds compared with benchmark German bunds.
"If the (austerity) programme is implemented, it is not very
important what is reflected on the market," Orphanides said when
asked why markets were not convinced Greece could handle its
The overborrowed country has secured emergency funding up to
late 2012 under the bailout agreed last May.
Financial markets are increasingly convinced Greece will
have to renegotiate the terms of its public debt, believing its
economy cannot grow fast enough to service a burden that is set
to swell to almost 160 percent of national output.
"In the past 12 months we have seen significant progress on
the implementation of the programme and I commend the Greek
government on this progress," Orphanides said. "I have no reason
to doubt the decisiveness and courage of the Greek government to
continue this programme."
(Editing by Ruth Pitchford)