By Stephen Jewkes and Michael Shields
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MILAN/VIENNA (Reuters) - European Central Bank policymaker Ewald Nowotny on Tuesday favored giving Greece more time to repay its financial aid rather than issuing new loans, and he and another ECB official ruled out a debt restructuring.
Nowotny and ECB Executive Board member Lorenzo Bini Smaghi both said a Greek debt restructuring would damage both Greece and other countries in the 17-member euro zone.
"You have to be aware that this would immediately have massive consequences for the Greek banking system and for the banking system overall," Nowotny told Austrian radio. "That would only heighten the crisis."
Nowotny said it was primarily up to Greece to put its financial house in order and that a restructuring must be avoided.
Greece expects to receive a new aid package totaling nearly 60 billion euros as soon as next month, news agency Dow Jones reported a senior Greek government official as saying on Tuesday.
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The Greek government was not immediately available for comment on the report, which drove the euro higher against the dollar and narrowed Greek debt spreads.
"It does not have to be fresh loans. It could also be a question of the time horizon of how long one has to repay," Nowotny said, noting Greece next year had to repay 25 billion to 30 billion euros.
Debt-ridden Greece wants international lenders to ease terms of a 110 billion euro bailout and get fresh funding to avoid default, Greek officials said on Monday.
Greece said it was talking with euro zone partners on ways to plug a 27 billion euro ($39 billion) funding hole next year as a new credit rating cut, by S&P, made its return to markets even more difficult.
Given Greece's financing crunch, some eurosceptic members of German Chancellor Angela Merkel's coalition and a senior German economist, Ifo Institute President Hans-Werner Sinn, said at the weekend Greece should be encouraged to abandon the euro.
Bini Smaghi said an exit from the euro by Greece would hurt not just Greece but other countries too.
"I cannot understand the idea on the other hand of making more aid conditional on some kind of debt restructuring of the country receiving aid," he said.
He said that would produce "perverse behavior" allowing part of the debt not to be paid in exchange for more debt.
Asked about the fact that many in Germany were pushing for a Greek debt restructuring he said: "It is a self-harm position because the main creditors are in Germany."
Another ECB policymaker, Juergen Stark, said the program Greece agreed a year ago with international lenders in exchange for a bailout was realistic and must be implemented.
"Greece has a high debt level, but Greece is not insolvent," said Stark, who is also a member of the ECB's Executive Board, which runs the central bank's day to day business.
Nowotny said international aid to Greece was correctly conceived but officials had underestimated the depths of the country's problems and structural shortcomings such as tax collection, which meant the aid program may not be wrapped up on time.
"We will probably need more time," he said.
A meeting of top officials from euro zone countries on May 16 was the proper venue to address the issue, Nowotny said, criticizing a meeting by a select group of countries from the bloc last Friday, the existence of which leaked out.
"This (May 16) meeting and this group is the one that really decides such things. I think the improvised meeting of last Friday was unfortunate. It had only negative effects. It is important to return to orderly, serious negotiations."
(Writing by Paul Carrel; Editing by John Stonestreet)