Frankfurt - The ECB has unveiled a new crisis-fighting tool to counter an "unwarranted" jump in borrowing costs for more indebted eurozone governments as it hikes its interest rates for the first time in over a decade.

Here are the key things to know about the European Central Bank's targeted bond-buying scheme, called the Transmission Protection Instrument (TPI).

- What is it? -

By buying up a specific country's bonds, the ECB aims to prevent "fragmentation" in the euro area, or a divergence in sovereign debt costs between fiscally sound members like Germany and more fragile ones like Italy, Spain or Portugal.

The ECB fears that a widening gap -- or spread -- between countries' borrowing costs could threaten the even transmission of its monetary policy across the 19-nation club and its mandate of achieving price stability.

The scheme "can be activated to counter unwarranted, disorderly market dynamics that pose a serious threat to the transmission of monetary policy across the euro area", the ECB said.

There will be no fixed limit to the amount of bond purchases under the scheme, the ECB said, adding that it would target public sector bonds with a maturity of one to 10 years. Private sector bonds could be considered as well.

"The ECB is capable of going big," President Christine Lagarde told reporters.

ECB agrees new crisis tool to ease bond market stress

- Who is eligible? -

The scheme is open to all euro area countries, with the ECB deciding eligibility based on four criteria.

These are mainly centred around compliance with European Union budget rules and reform programmes as well as having "sound" macroeconomic policies, and there will be conditions attached to benefiting from the scheme.

Lagarde stayed coy however on what exactly it would take for the ECB to trigger the TPI, saying it would be up to the governing council's "own discretion".

The ECB "would rather not use it. But if we have to use it, we will not hesitate", Lagarde said.

- Italy in focus -

All eyes are on debt-laden Italy, which is engulfed in a political crisis and has seen its debt costs jump ahead of the ECB's long-awaited interest rate hike as investors demand a premium for the perceived risk in holding Italian bonds.

Italy's 10-year bond yield stood at 3.55 percent early on Thursday, or 223 basis points higher than German Bunds, considered the benchmark of creditworthiness.

The spread widened to 233 points on Thursday afternoon following Lagarde's press conference and as the country braced for a period of instability following Mario Draghi's resignation as prime minister.

Observers have pointed out that Italy's financial market turbulence is in part self-inflicted and may not merit an ECB intervention.

The bank will anyway have to tread carefully to avoid accusations that it is engaging in direct monetary financing of troubled countries, which goes against its mandate.

However, "it may prove difficult to convince the broader public that the ECB is not drawn into political considerations when faced with the crucial decision to activate the TPI", said Frederik Ducrozet, head of macroeconomic research at Pictet.

- Other weapons -

The TPI is not the ECB's only weapon to fight bond market strain and stave off another euro crisis.

The ECB's massive pandemic-era bond purchasing programme (PEPP) will serve as the first line of defence, Lagarde said.

Although the scheme recently ended, the ECB's "flexible" reinvestment of maturing bonds allows it to hoover up debt from more at-risk eurozone members.

Lagarde's predecessor Draghi also left the ECB with a tool known as Outright Monetary Transactions (OMT), launched during 2012 eurozone debt crisis.

The OMT would allow the bank to buy up unlimited amounts of a specific country's debt in exchange for tough reforms. The country must also have applied for a bailout from the European Stability Mechanism.

The mere announcement of the tool, coupled with Draghi's pledge to do "whatever it takes" to save the euro, was enough to calm markets and has never had to be used.

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