Trichet's failure to offer full ECB support piles on the misery

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 to these worries, 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 in his comments. "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 at the close of business on Wednesday.

Global stock markets also fell, with the main Italian index suspended at the close, as worries about Europe added to persistent concern over global growth.

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.

One trader summed up the market reaction thus: "[The ECB's bond-buying programme] is back but it's not in the right places: what's going to stop us attacking Spain and Italy over the summer months? Because I can't think of anything."

Adding to the concern in the markets was Mr Trichet's admission that the ECB council was not unanimous when it came to the decision on bond buying. Although approved by a majority, Mr Schmieding said the lack of consensus meant that the "ECB would find it difficult to go much beyond [Thursday's] apparent decision."

Bank of England holds interest rates at record low

The Bank of England held interest rates at a record low of 0.5 per cent yesterday, against the backdrop of growing concerns about the state of the British economy.

The decision had been expected following last week's figures showing second-quarter GDP growth of just 0.2 per cent, and this week's warnings from the Office of Budget Responsibility and the International Monetary Fund about the continuing weakness of the UK economic recovery.

So far the Bank's Monetary Policy Committee has voted not to extend its quantitative easing programme. But when the minutes of yesterday's meeting are published in a few weeks' time, they are expected to show an increasingly sharp debate on the subject.