ATHENS, March 12 (Reuters) - Greece"s economy will shrinksome 2 percent this year though measures to tackle the country"sfiscal crisis should cut debt servicing costs, European CentralBank Governing Council member George Provopoulos told Reuters.
Following are highlights from his interview with Reuters.
FISCAL TARGETS AND THE GROWTH OUTLOOK IN GREECE
"I am confident that the deficit will be reduced below 3percent of GDP by 2012."
"All bold fiscal consolidation packages initially have somecontractionary effects. It is one reason that we expect economicactivity to contract by 2 percent this year. However, the fiscalconsolidation package will also create the conditions forsustainable growth in the future, something that would not occurin the absence of a credible fiscal consolidation programme.Therefore, I am optimistic and believe that, as the governmentpursues its programme, while enriching it with structuralpolicies, we will transform a vicious circle into a virtuouscircle. This will create a positive momentum for sustainablegrowth."
GREEK DEBT
"It is obvious that we have recently had an overshooting ofGreek sovereign bonds spreads. However, in previous pre-crisisyears, the spreads were unrealistically narrow. Therefore, inprevious years, we had one extreme, but now we are experiencingthe opposite extreme."
When will they start coming down? "It is a matter of time. Icannot tell you if it will take weeks or months, but it iscertain that they will move downward. I cannot predict the paceat which this will happen."
"Although Greece is in a difficult fiscal position, it hasalready adopted bold policies that will favourably affect thedebt dynamics."
"I am optimistic now after the government took courageousmeasures to correct the situation. I believe that they will alsoimplement structural policies. For example, we need toliberalise the labour market and the product market. We alsohave to reform the pension and health-care sectors. Suchstructural policies, coupled with the bold fiscal package, willtake Greece out of this crisis and move it into a virtuouscycle."
When will Greece have primary surpluses?
"I am confident that it will happen over the medium tolong-term horizon. Our fiscal situation was clearlyunsustainable, so we have to make continued progress to steadilyimprove the public debt to GDP ratio. To do that we have to havesubstantial primary surpluses."
"Some other countries also have unsustainable fiscalpositions and will have to follow credible fiscal consolidationpaths."
"The (ECB) Governing Council has stated that the measuresannounced by the Greek government are convincing. The statementby the Council was clearly a strong support for the measures,which will enhance their credibility."
COLLATERAL
"There is room for consideration about the feasibility ofapplying larger haircuts against lower credit ratings oncollateral. Governor Weber"s idea is deserving of examinationand assessment."
"One should, however, be pragmatic. If events show that somerules have to be replaced by better ones, then existing rulesshould be changed. On the other hand, if rules are changed toooften and haphazardly, there would be a loss of credibility."
CREDIT RATINGS
"Given that Greece has undertaken bold and credible economicpolicies, I am not concerned that the rating agencies mightdowngrade."
"In fact, upgrading is just a matter of time. As thegovernment"s new measures start producing positive results,there will be ratings upgrades. It is a matter of quarters orpossibly months."
INTEREST RATES
"We never precommit, because we do not know what mighthappen in the future ... Current rates are appropriate."
"Despite the fact that the ECB is a relatively newinstitution, our credibility is very high."
"We have a single needle in our compass -- price stability.Any change in our policy stance will depend upon our achievingthat objective."
EURO-ZONE GROWTH, INFLATION
"Growth is on track. There are signs that it will be uneven.In terms of inflation, it will be subdued over thepolicy-relevant horizon."
"The adverse weather conditions in Germany and in othercountries in northern Europe in the first quarter haveundoubtedly affected economic activity but this does notfundamentally alter the expansionary path."
Asked on growth being non-inflationary in the medium term,he said: "This is the ideal situation for any central bank."
REMOVING CRISIS MEASURES
"Price stability is our primary objective ... We are phasingout measures in a gradual but progressive manner."
Asked how difficult it was to arrive at decisions in March:
"Our decisions were taken on the basis of an overwhelmingconsensus. Of course we always have comprehensive discussions."
On extending full allotments beyond October 12: "I cannotprejudge what our decision might be."
"I would expect to see bid rates on the three-month tendersto be close to the main refinancing operation rate."
"I do not expect the EONIA to move close to the MRO rate inthe near future. The large amount of liquidity on the market,along with the fact that the interbank market is not yet fullyback to normal, will keep the EONIA close to the rate on thedeposit facility."
"As the normalisation of the markets continues, there willbe more trading activity in the interbank market and lessreliance on the Eurosystem for liquidity. We will then see theEONIA rising toward the MRO rate."
EUROPEAN MONETARY FUND
"Let"s see what details might emerge and then we can discussit ... However, I am a firm believer in sticking to rules. If inpast years, all countries, including my own, had respected theStability Pact in a rigorous way, we would not now be facing theproblems that confront us."
"If we, therefore, had abided by the present rules, theremight not be a call for new institutions such as a EuropeanMonetary Fund."
"There are also other countries which did not respect thefiscal rules. Greece was not the exception."
COVERED BONDS
"The recent decision by the Governing Council to enableEurosystem central banks to make their portfolio of coveredbonds bought under the programme available for lending will haveno bearing on the termination of the programme."
CONSOLIDATION IN GREEK BANKING SECTOR
"Consolidation of the Greek banking system over a medium tolonger-term horizon is inevitable. In the coming years, theeconomic landscape in Greece and in neighbouring countries, inwhich Greek banks operate, will differ somewhat from thelandscape of the past 10 or 15 years. Spreads will tend todiminish, creating conditions for consolidation. I am referringto the next few years, not the next months."
CREDIT EXPANSION IN GREECE
"We have not made any forecast, but given that economicactivity will be quite weak, demand for credit will also be weakand so will credit expansion. I am optimistic that towards theend of this year, things will start to improve in line withpositive developments in economic activity."
(Reporting by George Georgiopoulos and Sakari Suoninen;editing by John Stonestreet)
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