BRUSSELS (MNI) – The uncertainty and tension in the Eurozone
sovereign debt market is not a true reflection of the default risk, the
Chief Executive Officer of the European Financial Stability Fund, Klaus
Regling, said on Wednesday.

Europe’s governments set up the EFSF in May this year to provide
last-resort loans to cash-strapped Eurozone states whose cost of
borrowing had risen in response to investor fears about their solvency.
At the time, Eurozone officials said it was just a backstop and they
hoped it would never be tapped.

Earlier this week, however, Ireland became the first Eurozone
country to tap the EFSF after the cost of repairing its embattled
banking sector pushed its budget deficit to 32% of its GDP and markets
attacked Irish sovereign debt, pushing financing costs for the state up
to unsustainable levels.

“We know that markets overshoot, driven by herd behaviour,” Regling
said, according to the text of a speech delivered in Singapore.

“On a positive note, one can say that markets have improved in
differentiating the fiscal situations across EMU countries. I consider
this to be an important factor in limiting contagion,” he added.

“On a less positive note, one could argue that prices in relatively
thin markets are to a large extent driven by sentiment and do not
capture real default risks,” Regling said. “The evolution of sovereign
bond and CDS spreads earlier this year and again in recent days is
indeed hard to explain…from a purely economic perspective.”

His comments echo those made by European Central Bank President
Jean-Claude Trichet and European Commissioner for Economic and Monetary
Affairs, Olli Rehn, who have both argued that the financial markets
haven’t understood all the work that the Eurozone has done to fend off
its sovereign debt crisis.

This year Greece and Ireland have both been offered European loan
deals in exchange for agreeing to implement strict austerity packages
aimed at reducing their budget deficits back below the EU’s 3%
stipulated limit.

But the efforts don’t seem to have calmed the markets, with the
euro falling below $1.30 Tuesday for the first time since September and
sovereign spreads of high debt and deficit countries still widening —
though they have tightened back so far this morning on reports of strong
bond buying by the ECB.

“There is continued uncertainty and tension in sovereign debt
markets,” Regling noted in his speech. However, “recent economic news
from surveys as well as hard data have overall confirmed that Europe
continues its recovery,” he said.

“You can easily miss that in the midst of all the excitement about
crisis management and rescues of Greece and Ireland. The main message
that I would like to convey to you today is that European Governments
have done a great deal this year to put structures and policies in place
to address the problems that accumulated during the first decade of the
Economic and Monetary Union and which became so visible during this
crisis.”

–Brussels: 0032 487 (0) 32 803 665, echarlton@marketnews.com

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