By Gavin Jones
ROME (Reuters) - European Central Bank Governing Council member Ignazio Visco said on Friday he was in favor of reforming the euro zone's bailout fund but that some proposals carried risks that needed to be carefully considered.
The Italian government has opposed proposals to turn the European Stability Mechanism (ESM) into a sort of European Monetary Fund which would make support for countries in financial crisis conditional on them restructuring their debt.
"This is a matter to be handled with care," the Bank of Italy governor said in a speech in Rome.
"Clarifying the conditions and procedures for restructuring would certainly reduce the part of the cost of a sovereign default which can be attributed to uncertainty over the manner and timing of its solution," he said.
However, he added that this was only a small part of the cost of sovereign insolvency.
"The small and uncertain benefits of a debt-restructuring mechanism must be weighed against the huge risk that the mere announcement of its introduction may trigger a perverse spiral of expectations of default, which may prove to be self-fulfilling."
The issue of debt restructuring is particularly sensitive in Italy. Its public debt, at around 135% of gross domestic product, is proportionally the highest in the euro zone after Greece's, and its sustainability is often questioned at times of rising bond yields.
Visco said euro zone countries needed help to reduce their public debts, and to this end "some form of supranational insurance is needed".
He called for the creation of a European debt redemption fund financed by dedicated resources of the participating countries.
Visco stressed the importance of more expansionary fiscal policies in order to raise inflation in the euro zone and counter its ongoing economic slowdown.
The ECB this month resumed its bond purchasing program known as quantitative easing.
But Visco said governments needed to share more of the burden. "Acting in isolation, monetary policy can do nothing but continue along the path of 'non-standard' measures," he said.
"This increases the risk of adverse side effects, which, in turn, need to be kept under control using instruments of an increasingly administrative nature."
The Italian central bank chief also called for an acceleration in economic integration, saying the European single currency "needs to interact with a single fiscal policy."
(Reporting by Gavin Jones; Editing by Hugh Lawson and Crispian Balmer)