ECB's limited support piles pressure on Italy and Spain

There was a sharp escalation in the sense of crisis in the eurozone last night after the European Central Bank (ECB) failed to reassure nervous investors.

Fears of a sovereign debt disaster in Italy or Spain mounted despite ECB president Jean-Claude Trichet signalling an intervention in the government bond markets after an 18-week hiatus. He also announced plans to offer six-month loans to banks struggling to raise funds in volatile markets.

But any relief was swiftly overshadowed by mounting concern about signs that, contrary to market expectations, the ECB may not be in the mood to buy Italian and Spanish bonds. Instead, the central bank appeared to be picking up Portuguese and Irish bonds, according to those monitoring the markets. In addition, an EU source suggested that the scope of the bond-buying programme would indeed be narrow.

Mr Trichet himself appeared deliberately to set out to be cautious. "You will see what we do," he said at a press conference after the ECB's council revealed it had decided to keep euro-area interest rates on hold at 1.5 per cent.

Concerns that the Continent's monetary authorities may not have done enough triggered another rise in Spanish and Italian borrowing costs, with investors demanding interest rates of more than 6 per cent to lend money to either country for 10 years.

"If it turns out that the ECB does not buy Spanish and Italian bonds, the signal might do very little to address the key problem, namely that of contagion to the weightier economies of Italy and Spain," Berenberg Bank economist Holger Schmieding said.

In another indication that Mr Trichet had failed to soothe nerves, the premium that investors demand to hold Italian debt over safer German debt ballooned to more than 390 basis points – the highest since 1999. For Spain, the spread rose to 400 basis points, against 392 points on Wednesday.

Earlier, expectations that the ECB would buy Spanish and Italian bonds had helped Madrid to sell €3.3bn worth of bonds to investors in its latest debt auction, but the mood then soured.