By David Barwick – BANGKOK (Econostream) – European Central Bank Governing Council member Gediminas Šimkus said Thursday that higher sovereign yields and wider spreads in the euro area largely reflected differences in countries’ fiscal positions and credit risks and did not necessarily amount to market fragmentation.

Šimkus, governor of the Bank of Lithuania, told the Bangkok Economic Festival that policymakers should be cautious about drawing broad conclusions from differences in sovereign borrowing costs.

“We very quickly jump on to say very broad conclusions on market fragmentation,” he said. “But in reality what we see is increased sovereign yields and spreads.”

To a large extent, he said, those moves reflected market perceptions of countries’ financial conditions and creditworthiness.

“We shouldn’t be surprised that we see a different market perception of different credit risk in different countries, because these countries are different,” Šimkus said.

Countries differed in fiscal prudence, debt levels, economic structures and growth prospects, he said, meaning investors could legitimately price their sovereign debt differently.

“This does not necessarily mean that something goes wrong with market fragmentation,” he said.

Šimkus also said the euro area economy had proved more resilient than expected, but argued that this partly reflected excessive pessimism in the forecasts made when recent shocks first hit.

“My thinking is that it’s not only that the euro area economy is more resilient, but at the initial phases when we make projections, we were too pessimistic about the strength of the euro area economy,” he said.

That suggested forecasting models had missed some factors supporting activity, Šimkus said.

He pointed to the strength of the labor market, with employment continuing to grow and unemployment around historical lows, as an important support for consumption.

Public investment in infrastructure and defense had also supported activity, while manufacturing and global demand had performed more strongly than expected, he said.

“So there is something in the economy that [we] missed when we make forecasts in the model, which basically supports the growth of the economy,” Šimkus said.

On food inflation, Šimkus stressed the unusually high degree of uncertainty surrounding projections, given the importance of weather conditions as well as developments elsewhere in the world.

“When we try to forecast food prices, there are so many unknowns,” he said, adding that the outcome would depend heavily on weather and other global factors.

He said the ECB still expected elevated food inflation next year but cautioned against putting excessive weight on individual quarterly outcomes.