The European Central Bank revealed Wednesday that it intends to develop a new instrument to combat the possibility of eurozone fragmentation, in an effort to allay fears of a new debt crisis.

The decision follows the central bank’s surprise emergency meeting to address increased borrowing costs for numerous European countries.

“Since the gradual process of policy normalization was initiated in December 2021, the Governing Council has pledged to act against resurgent fragmentation risks,” the ECB said in a statement.

“The pandemic has left lasting vulnerabilities in the euro area economy which are indeed contributing to the uneven transmission of the normalization of our monetary policy across jurisdictions,” it added.

The remarks are in response to the recent increase in bond yields over the last week or two. Following a regular policy meeting last week, the ECB foreshadowed more aggressive policy tightening but failed to deliver any new measures to assist the bloc’s highly indebted nations.

This caused considerable concern among money managers about financial fragmentation, which resulted in an increase in bond yields.

Italy’s 10-year bond yield surpassed 4% earlier this week, with one analyst warning that such levels “may eventually turn into a nightmare” for the south European country.

To address these concerns, the ECB announced on Wednesday that it will reinvest redemptions from its emergency bond purchasing programme, known as PEPP, in a flexible manner and will direct its team to “accelerate the completion of the design of a new anti-fragmentation instrument.”

“Our commitment to the euro is our anti-fragmentation tool. This commitment has no limits. And our track record of stepping in when needed backs up this commitment,” Isabel Schnabel, a member of the ECB’s executive board, said in Paris, France on Tuesday.  

Bond rates in the eurozone dipped on Wednesday morning following the unexpected announcement of an emergency meeting.

Meanwhile, the euro rose against the US dollar on predictions that the ECB will implement measures to prevent fragmentation.

(Adapted from CNBC.com)

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