The European Union lost investors' trust in sovereign debt when the EU forced them to take losses on Greek debt last year, the governor of the Central Bank of Cyprus told CNBC Friday.
"During the crisis we lost the trust of investors in European sovereign markets," Athanasios Orphanides said Friday, the same day the euro fell below $1.27 for the first time since September 2010.
Thanks to the EU's decision to impose 50-percent losses on holders of Greek debt, "we have actually created a lot of credit risk in the minds of investors, and this has put pressure on markets in a number of other countries."
Governments "should try to honor their commitments" rather than impose "haircuts," or a losses, on investors, said Orphanides, also a member of the European Central Bank's Governing Council.
"By making a political decision on the European level to impose haircuts on Greece, we have created doubts about possible haircuts in other countries," he said.
He said the European leaders' decision during their December summit to adopt a new fiscal compact "strengthens considerably the fiscal framework in the euro area" and is "an important step on the way to solving the sovereign crisis. But that is just one step and more needs to be done."
He would not say directly whether Europe is in a recession, but noted ECB projections published last month were "worse than three months ago and shows weakness that was not there three months ago." Still, he said, "if you look at the data country by country you see some members growing quite rapidly" while "other member states are facing difficulty."
— Reuters contributed to this article.