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UPDATE 1-ECB's Bini Smaghi: No risk of default in euro zone

Published 03/06/2009, 03:46 AM
Updated 03/06/2009, 03:48 AM

* Bini Smaghi sees no chance of euro zone govt defaulting

* Calls talk of euro zone breakup nonsense

* Says euro zone may be past trough of recession

* Says ECB not ruling anything out on other easing measures

(adds quotes, background)

ROME, March 6 (Reuters) - European Central Bank Executive Board member Lorenzo Bini Smaghi said on Friday he saw no chance of a euro zone country defaulting on its sovereign debt, calling the idea of a euro zone break-up "nonsense".

Bini Smaghi, speaking in a television interview, also said eastern European countries were in difficulty because they were not part of the euro zone, and the European Union should come up with a case-by-case aid framework for these countries.

Asked whether there was a risk of a euro zone country defaulting, Bini Smaghi said: "No, no, there isn't. It's more of a journalistic hypothesis than a realistic one."

He added that for the time being, deflation in the euro zone was "not a realistic hypothesis".

"If we look at all the forecasts, the indicators of the financial markets ... there is no expectation of a reduction in prices for 2-3 years in a row," he said.

The ECB cut its benchmark rate to an all-time low of 1.5 percent on Thursday and signalled it could go even lower. Its staff shocked economists by forecasting the euro zone economy could shrink by more than three percent this year.

The mid-point of the forecasts envisaged a GDP contraction of 2.7 percent. Bini Smaghi said he expected the low point of the cycle would be between the last quarter of 2008 and the first quarter of this year.

"All of 2009 will be negative, but maybe less negative than the last quarter of 2008 ... The negative elements should diminish in 2009 and become positive in 2010," he added.

On Thursday ECB President Jean-Claude Trichet said policymakers were still looking at other possible ways to boost the region's economy.

Like Trichet, Bini Smaghi declined to elaborate on what kind of unconventional monetary policy the ECB is considering, saying only: "We don't rule out anything."

(reporting by Silvia Aloisi and Gavin Jones; editing by David Stamp)

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