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ECB to devise new tool to help indebted euro zone members

FILE PHOTO: Illumination at ECB headquarters for the Euro's 20th anniversary in Frankfurt, Germany

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

MARKET REACTION:

The euro fell around a half a percent against the dollar on the ECB's 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 prior to the ECB's statement.

REACTION:

ANNALISA PIAZZA, FIXED-INCOME RESEARCH ANALYST, MFS INVESTMENT MANAGEMENT, LONDON

"As for the anti-fragmentation tool, the acceleration of the completion suggests the ECB now feels the urge to have something more 'structural' that allows a smooth transmission of their policy stance. In a nutshell, the ECB need to hike rates to avoid inflation expectations becoming entrenched. Should fragmentation intensify further, the normalization of policy rates would have to stop sooner rather than later.

"Although the ECB announcement didn’t add much to what we already knew, the signalling is clear. This is not a 'whatever it takes' moment for Lagarde but the ECB shows where their pain threshold is."

PIET CHRISTIANSEN, CHIEF ANALYST, DANSKE BANK, COPENHAGEN

"I think essentially it is the bare minimum of what could be expected, but I also believe it's the most realistic outcome of what they could compromise today. Also, that the ECB is tasking the committees I think it is a strong signal that they are fully committed to ensure their monetary policy transmission, but at the same time they bought themselves some time to see how much of this can actually be solved by itself.

"We will probably only get some sort of details in July or September."

ANTOINE BOUVET, SENIOR RATES STRATEGIST, ING, LONDON:

"There is one important message. They will unveil something, we don't know when but... their next governing council meeting (in July) seems like the natural time to announce.

"I'm relatively upbeat because the fact that we know something is officially in the works now is already providing some reassurance to the markets.

"We don't know the design of the facility, we don't know if it will be credible or not, but more likely it will be.

"What counts is something is coming and that at least reassures potential Italian bond sellers that there is a limit to how much spreads can widen."

MARCHEL ALEXANDROVICH, EUROPEAN ECONOMIST, SALTMARSH ECONOMICS, LONDON

"Last week we only heard one side of the story from the ECB about what they will do on rate hikes, but not what they would do about fragmentation risks.

"Obviously they are now trying to rectify this.

"The statement is short on detail, they say they can be flexible on reinvestment. In circumstances like this, it would be good to know how much are they going to deviate from the capital key when it comes to reinvestments.

So, yes they could overbuy in weaker bond markets but we won't know by how much for a couple of months. They also refer to a new tool and that implies a dedicated programme. That is more interesting but it is short of detail.

"The response is not optimal but it is a first response."

(Reporting by London Markets and Finance Teams; Editing by Alex Richardson)