Draghi under pressure to keep pledge on saving euro
Investors will keep close eye on landmark meeting of ECB policymakers this week
European Central Bank president Mario Draghi must back up his pledge to do what it takes to protect the euro when the bank's policymakers meet on Thursday or else face deep disappointment from investors hungry for -- and expecting -- immediate action.
In his boldest comments to date, Mr Draghi said last week that, within its mandate, the ECB was ready to do whatever it takes to preserve the euro, fuelling expectation the bank could revive its bond purchase programme as it did a year ago when it started buying the government debt of Spain and Italy.
The talk has already lowered Italian and Spanish bond yields, and the extent to which markets are now primed for a move on Thursday was clearly spelt out in a Reuters poll.
Nineteen out of 24 money market traders said they expected the ECB to restart its mothballed bond-buying programme with purchases of Spanish and Italian debt, with 10 out of 19 expecting it to announce this on Thursday.
But such a step is far from certain, and the ECB may hold off to intervene in tandem with the eurozone's EFSF rescue fund. Instead, the ECB could explore new policy tools such as outright asset purchases, or quantitative easing, which Britain, the United States and Japan are using to stimulate growth.
There have also been recent suggestions that it could empower national central banks to broaden their asset-buying abilities.
The ECB is under intense pressure from within and outside the eurozone to intervene and bring those governments' soaring borrowing costs under control as the debt crisis deepens and increasingly poses a risk to the global economy.
Reflecting the increased tension, US Treasury Secretary Timothy Geithner flew yesterday to Germany, the eurozone's biggest economy and key to any euro rescue plan, and met Germany's finance minister Wolfgang Schaeuble.
After their meeting on a remote North Sea island where Mr Schaeuble interrupted a holiday, they issued a statement saying they were optimistic about reform in the eurozone.
Mr Geithner later met Mr Draghi in Frankfurt, but he left that meeting without comment, and no statement was issued.
The ECB chief will also meet Bundesbank president Jens Weidmann, a strong opponent of the ECB's government bond purchase programme, ahead of Thursday's ECB meeting, a central bank source said.
The prospect of a stronger ECB crisis response drove Italy's 10-year funding costs below 6pc for the first time since , but fresh turmoil is likely if Mr Draghi fails to convince investors on Thursday.
"With expectations running high, the scope for disappointment at Thursday's ECB policy meeting has increased considerably," said Nicholas Spiro at Spiro Sovereign Strategy.
The August meeting usually draws little attention and in fact the ECB used to skip the summer month's meeting until 2006 -- the last year in which it took policy action in August.
The ECB could well break with tradition this year. It has resisted so far stepping up its action for fear of taking away incentives for governments to implement tough reforms. (Reuters)