VIENNA (MNI) – Much greater detail is still required to evaluate
the outlook for Eurozone inflation, but energy prices will probably not
be as robust as they were over the last six months, European Central
Bank Governing Council member Ewald Nowotny said Monday.

Speaking to the press on the margins of a conference hosted by the
Austrian National Bank, which he heads, Nowotny nonetheless predicted
relatively high inflation over the coming months.

EU Economic and Monetary Affairs Commissioner Olli Rehn, also
present, refused to comment directly on the poorer outlook for Italy
announced over the weekend by S&P, but he highlighted that Rome’s
fiscal polices are on track.

Asked if he was in a state of “strong vigilance” with regard to
monetary policy, Nowotny observed that “the Governing Council will come
together in June and there we will see what the data are and then we
will take decisions.”

“We have to expect still relatively high inflation rates for the
coming months, but the medium-term perspective, that means 2012, is
something for which we still need much more detailed information,
especially about energy prices,” he said.

In any case, Nowotny added that he does “not expect a similar
increase in energy prices as the last half year.”

Queried on comments from the ECB to the effect that a Greek debt
restructuring would lead to the exclusion of that country’s collateral
from ECB refinancing operations, Nowotny noted that the central bank
accepts collateral as determined by its so-called general documentation.

“There is a certain kind of evolution, a discussion of course from
time to time, about what to include and what not,” he said, but “as long
as we can make sure that countries have an IMF/EU/ECB program and the
program is on track,” then there are no grounds for excluding a
particular country’s debt as collateral.

“This is the basis on which we are working; everything else has to
be discussed when it comes up in practice,” he said. There is “no
specific — to my knowledge — initiative to change this general
documentation and I do not see, for the countries that have an IMF/EU
program any need for changing, as long as these programs are on track.”

On the downgrade over the weekend by S&P of its Italian long-term
credit outlook from stable to negative, Rehn would only say: “We are
seeing relatively solid [Italian] growth and we are seeing a
determination to reduce the fiscal deficits.” That, he said, is
reflected in the European Commission forecasts that were published on
May 13.

“There are challenges in terms of structural reform in Italy,
certainly, but at the same time the fiscal policies are on track and the
country is showing positive growth for this year and next year,” he
added.

Other countries in Europe are not necessarily going to be attacked
by skeptical financial markets, Rehn suggested, noting that “even when
Portugal made the request for financial assistance from the European
Union, [neighboring] Spain was not substantially affected.”

Still, Spain must continue down the path of fiscal consolidation,
structural reforms and financial sector repair, he said. Markets,
however, recognize the progress, Rehn added.

“As regards Greece, the sine qua non, the necessary condition of
any further steps by the EU”, is for two things to happen “in the coming
days,” he insisted.

“First, Greece needs to take decisions on how it will meet its
fiscal target this year…and second, the Commission and also the member
states want to see that Greece will indeed launch its privatization
program.”

“And once we see that this credibility test…is met by Greece,
then we can move to the next phase, which is to assess what other
measures are needed. This is a work in progress and I expect that in the
coming weeks we will be able to take decisions concerning how Greece
will be refinanced from 2012 and especially what Greece itself is doing”
to ensure that it can be refinanced from 2012 onwards, he said.

Rehn said that “in the coming days and weeks” Greece would “take
new steps in order to convince its partners and the creditor countries
by deciding on new consolidation [measures] and launching privatization”
plans.

Member states of the European Union will show the determination to
do what is needed to help the Union as whole overcome the crisis, he
predicted.

It is important for Greece to return to a primary surplus, Rehn
affirmed, and “in any case [debt restructuring] would not be a
substitute for the reforms needed to create a primary surplus.” So
Athens must commit to “full implementation” of its consolidation plans.

However, he added that, “while debt restructuring is not on the
table…we have said that a voluntary extension of loan maturities…
could also be examined.”

In other comments, Rehn predicted a return to growth in Greece in
the second half of 2011 and said the IMF’s current turmoil — following
the arrest of its Managing Director Dominique Strauss-Kahn — would not
hinder decision-making to deal with the European sovereign debt crisis.

–Frankfurt bureau tel.: +49-69-720142. Email: dbarwick@marketnews.com

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