ECB promises to design new tool to support indebted members

© Reuters. FILE PHOTO: The European Central Bank (ECB) logo in Frankfurt, Germany, January 23, 2020. REUTERS/Ralph Orlowski/File Photo

By Balazs Koranyi and Francesco Canepa

FRANKFURT/MILAN (Reuters) -The European Central Bank unveiled fresh measures on Wednesday to temper a market rout that has fanned fears of a new debt crisis on the bloc's southern periphery but appears to have disappointed some investors looking for a more decisive step.

Government bond yields have soared on the 19-country currency bloc's periphery since the ECB unveiled plans last Thursday to raise interest rates in July and September to tame painfully high inflation that is at risk of becoming entrenched.

The sell-off was exacerbated by the absence of any concrete plan from the ECB to limit this rise in borrowing costs, raising fears that policymakers were too complacent about the situation of more indebted nations, such as Italy, Spain and Greece.

Facing the threat of a repeat of the debt crisis that almost brought down the single currency a decade ago, the ECB said it will be flexible in reinvesting cash maturing from its recently-ended 1.7 trillion euro ($1.8 trillion) pandemic support scheme and would consider a fresh instrument to be devised by staff.

"The Governing Council decided to mandate the relevant Eurosystem Committees together with the ECB services to accelerate the completion of the design of a new anti-fragmentation instrument for consideration by the Governing Council," the ECB said after an extraordinary meeting.

Investors appeared less than pleased as they had hoped for more decisive steps and more detail.

The euro fell around a half a percent against the dollar after the ECB statement while Italian yields jumped around 7 basis points.

The spread between 10-year Italian and German bonds, a key indicator, meanwhile widened to 239 basis points from around 224 before the announcement.

"This is what they should have said last week. Better one week late than never," Pictet Wealth Management economist Frederik Ducrozet said "Details will matter a lot, but now I can't see how they could not deliver by the next meeting."

Italian spreads peaked at around 250 basis points on Tuesday, their highest since early 2014 raising worries that Italy's high debt level could become unsustainable.

While there is no universally accepted level for this spread Carlo Messina, the CEO of Intesa, Italy's largest bank, earlier on Wednesday said the country's economic fundamentals would justify 100 to 150 basis points.

The spread on 10-year Spanish bonds meanwhile widened to 128 basis points after the ECB's announcement from around 125 while for Greece, it rose to 269 basis points from around 260.

ECB President Christine Lagarde is due to speak at 1620 GMT in London in an engagement scheduled earlier. ECB board member Fabio Panetta will also speak at 1315 GMT, though his speech will be about a digital euro. Both are expected to be answering questions.

($1 = 0.9542 euros)