ATHENS, March 12 (Reuters) - Greece's economy will shrink some 2 percent this year though measures to tackle the country's fiscal crisis should cut debt servicing costs, European Central Bank 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 3 percent of GDP by 2012."
"All bold fiscal consolidation packages initially have some contractionary effects. It is one reason that we expect economic activity to contract by 2 percent this year. However, the fiscal consolidation package will also create the conditions for sustainable growth in the future, something that would not occur in the absence of a credible fiscal consolidation programme. Therefore, I am optimistic and believe that, as the government pursues its programme, while enriching it with structural policies, we will transform a vicious circle into a virtuous circle. This will create a positive momentum for sustainable growth."
GREEK DEBT
"It is obvious that we have recently had an overshooting of Greek sovereign bonds spreads. However, in previous pre-crisis years, the spreads were unrealistically narrow. Therefore, in previous years, we had one extreme, but now we are experiencing the opposite extreme."
When will they start coming down? "It is a matter of time. I cannot tell you if it will take weeks or months, but it is certain that they will move downward. I cannot predict the pace at which this will happen."
"Although Greece is in a difficult fiscal position, it has already adopted bold policies that will favourably affect the debt dynamics."
"I am optimistic now after the government took courageous measures to correct the situation. I believe that they will also implement structural policies. For example, we need to liberalise the labour market and the product market. We also have to reform the pension and health-care sectors. Such structural policies, coupled with the bold fiscal package, will take Greece out of this crisis and move it into a virtuous cycle."
When will Greece have primary surpluses?
"I am confident that it will happen over the medium to long-term horizon. Our fiscal situation was clearly unsustainable, so we have to make continued progress to steadily improve the public debt to GDP ratio. To do that we have to have substantial primary surpluses."
"Some other countries also have unsustainable fiscal positions and will have to follow credible fiscal consolidation paths."
"The (ECB) Governing Council has stated that the measures announced by the Greek government are convincing. The statement by the Council was clearly a strong support for the measures, which will enhance their credibility."
COLLATERAL
"There is room for consideration about the feasibility of applying larger haircuts against lower credit ratings on collateral. Governor Weber's idea is deserving of examination and assessment."
"One should, however, be pragmatic. If events show that some rules have to be replaced by better ones, then existing rules should be changed. On the other hand, if rules are changed too often and haphazardly, there would be a loss of credibility."
CREDIT RATINGS
"Given that Greece has undertaken bold and credible economic policies, I am not concerned that the rating agencies might downgrade."
"In fact, upgrading is just a matter of time. As the government's new measures start producing positive results, there will be ratings upgrades. It is a matter of quarters or possibly months."
INTEREST RATES
"We never precommit, because we do not know what might happen in the future ... Current rates are appropriate."
"Despite the fact that the ECB is a relatively new institution, 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 achieving that 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 the policy-relevant horizon."
"The adverse weather conditions in Germany and in other countries in northern Europe in the first quarter have undoubtedly affected economic activity but this does not fundamentally 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 phasing out 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 overwhelming consensus. Of course we always have comprehensive discussions."
On extending full allotments beyond October 12: "I cannot prejudge what our decision might be."
"I would expect to see bid rates on the three-month tenders to be close to the main refinancing operation rate."
"I do not expect the EONIA to move close to the MRO rate in the near future. The large amount of liquidity on the market, along with the fact that the interbank market is not yet fully back to normal, will keep the EONIA close to the rate on the deposit facility."
"As the normalisation of the markets continues, there will be more trading activity in the interbank market and less reliance on the Eurosystem for liquidity. We will then see the EONIA rising toward the MRO rate."
EUROPEAN MONETARY FUND
"Let's see what details might emerge and then we can discuss it ... However, I am a firm believer in sticking to rules. If in past years, all countries, including my own, had respected the Stability Pact in a rigorous way, we would not now be facing the problems that confront us."
"If we, therefore, had abided by the present rules, there might not be a call for new institutions such as a European Monetary Fund."
"There are also other countries which did not respect the fiscal rules. Greece was not the exception."
COVERED BONDS
"The recent decision by the Governing Council to enable Eurosystem central banks to make their portfolio of covered bonds bought under the programme available for lending will have no bearing on the termination of the programme."
CONSOLIDATION IN GREEK BANKING SECTOR
"Consolidation of the Greek banking system over a medium to longer-term horizon is inevitable. In the coming years, the economic landscape in Greece and in neighbouring countries, in which Greek banks operate, will differ somewhat from the landscape of the past 10 or 15 years. Spreads will tend to diminish, creating conditions for consolidation. I am referring to the next few years, not the next months."
CREDIT EXPANSION IN GREECE
"We have not made any forecast, but given that economic activity will be quite weak, demand for credit will also be weak and so will credit expansion. I am optimistic that towards the end of this year, things will start to improve in line with positive developments in economic activity."
(Reporting by George Georgiopoulos and Sakari Suoninen; editing by John Stonestreet)