(Adds detail on banking package and next year's issuance)
By Boris Groendahl
VIENNA, Nov 19 (Reuters) - The head of Austria's debt agency said on Wednesday that Austrian government bond spreads over German bonds are currently about 25 basis points too high but will ease when markets settle down.
"We are currently 25 basis points too high -- at just over 50 basis point over bunds," Martha Oberndorfer told Reuters. "I clearly see this (coming down) because I expect the financial crisis to calm down... and the markets to become more 'normal.'"
The reason for the spread seen on Austrian and other smaller euro zone countries' debt was partly a flight into the most liquid German titles, and partly Austria-specific concerns over Austrian banks' exposure to emerging Europe, she said.
"Certainly for Austria there is currently not only the liquidity issue, but also the issue of Eastern Europe," she said. "I think this subject is currently overdone."
Austrian banks, which are among emerging Europe's biggest, are owed $290 billion by borrowers in the region, according to data from the Bank of International Settlements, making them the biggest lenders there ahead of their German and Italian peers.
"(The exposure) has a significant size but it is not something that could put our solvency at risk to the extent that is currently priced in," Oberndorfer said.
Oberndorfer took over as head of the Austrian Federal Financing Agency in January.
ISSUANCE RISING
Austria's debt issuance this year would be as much as 17 billion euros, much higher than the originally planned 12 billion to 15 billion to cover additional funding needs from the country's bank stability package, Oberndorfer said .
Austria has set up a 100 billion euro ($126 billion) package to stabilise its banks, which consists mainly of guarantees but also of up to 15 billion euros in capital injections.
"Up until October we expected to come in at the lower end of the range because of the good budget development," she said. "Then the financial stability measures were announced. From today's point of view I expect we'll get to 17 billion at most."
More measures under the banking package, tax cuts discussed in the current talks to form the next Austrian government, and a possible drop in tax revenues will probably raise issuance further to 21 billion to 27 billion euros next year, she said.
However, she cautioned that next year's range was dependent on a number of uncertain factors, such as how the expected economic downturn will affect tax revenues and how many banks will ask for capital injections under the banking package.
Oberndorfer reiterated that the agency would hold its scheduled bond auction in December, after having cancelled the November auction, and that she was looking to raise up to 1 billion euros in the deal.
"We are using different instruments to raise this -- partly through the December auction, through short-term instruments, Schuldschein loans and we are also using small transactions on foreign markets," she said.
Oberndorfer dismissed media reports that had suggested the agency cancelled the November auction because it was not happy with the pricing, saying that at the time the funding needs from the banking package had not been transparent yet.
It was not clear yet which part of the yield curve she would target in the December auction, she said, acknowledging high demand for the shorter end of the curve.
"I hear that too that the demand is mainly at the shorter end," she said. "But I also see selective demand in the 20-year and 30-year area." (Additional reporting by George Matlock; Editing by Victoria Main and Leslie Adler)