BRUSSELS (Reuters) - Greece should be given time to sort out its finances before talk of any debt restructuring, which would have serious consequences, Peter Praet, a candidate for the European Central Bank's Executive Board said.
"We have to think very carefully about the implications if you let a sovereign default of a country in the European Union," Praet told the European Parliament's economic affairs committee on Wednesday.
"Some say the negative externalities would be limited. Some have a different judgment, and that is my point of view," Praet told a hearing on his candidature for the ECB post.
"You have to give a chance to this programme (of debt reduction) in Greece. It's very tough but the country is very committed."
The consequences of debt restructuring would be "very painful. There are no free lunches," Praet said.
The EU and IMF have bailed out Greece, but some in the market fear a restructuring of its debt may be inevitable -- unless strong enough growth returns.
EU finance ministers have endorsed Praet's candidature to join the ECB at the end of May; final approval is expected from the ECB itself. EU lawmakers do not have a veto on the appointment of the Belgian to the European Central Bank.
Turning to inflation and the future course of euro zone interest rates set by the ECB, Praet said: "We are extremely vigilant, keeping a watching brief on what's happening in inflationary trends."
Praet was echoing the words of ECB President Jean-Claude Trichet earlier this month that prompted financial markets to bet that a rate rise next month is all but a done deal.
The current low interest rates could cause problems in the longer term by pushing investors looking for yields to move toward "certain bubbles," Praet said.
Praet, a former International Monetary Fund economist, is also a senior official at the Belgian Central Bank and a member of the Basel Committee of global banking supervisors.
Responding to calls for common issuance of government debt in the euro zone, Praet said that it would create a more liquid market but that the necessary "solidarity" framework was not in place.
"The time is not right. We don't have all the answers to that," he told the hearing.
He also doubted that a tax on financial transactions, which the European Parliament has backed, would dampen volatility in the markets.
It was too early to say what monetary policy implications the disaster in Japan would have in Europe, Praet said, but he added that Japanese payments systems were performing satisfactorily following the huge earthquake and tsunami.