FRANKFURT (MNI) – European Central Bank President Mario Draghi may
not arrive at today’s press conference empty handed, but markets remain
on edge, wondering whether he will live up to the promise that “it will
be enough.”

Draghi raised expectations of significant new measures last week
when he promised that “within our mandate, the ECB is ready to do
whatever it takes to preserve the euro.”

While a number of Governing Council members were surprised by
Draghi’s comments and his unilateral approach, raising questions about
his ability to deliver, the head of the ECB appears to have managed to
gain a broad consensus on the Council to react to recent market
tensions.

One option is for Draghi to present a plan for concerted action by
the ECB and Europe’s future permanent bailout fund, the European
Stability Mechanism, to bring down high bond yields in Italy and Spain.

Under this plan, the ESM would buy Spanish and Italian bonds on the
primary market while the ECB would purchase larger amounts of bonds on
the secondary market. To kick-start the process, Spain would have to ask
request the bailout to start buying its bonds.

This would mean that the ECB would only outline its future policy
course, signalling it is ready to act without intervening immediately.
Along with an aid request from Spain, the German Constitutional Court
would also have to give the green light for the ESM on September 12.

Should Draghi announce such a plan, the market reaction will depend
on details of the agrements. Will the ECB continue to sterilize its bond
purchases? Will it insist on its senior creditor status? Will the
central bank be prepared to enforce specific caps on sovereign borrowing
cost?

Another option under discussion is boosting the firepower of the
permanent bailout fund ESM by granting it access to ECB refinancing
operations. For this, it would appear more difficult for Draghi to
present an action plan today.

According to a legal opinion of the ECB from March 2011, it would
be illegal for the ESM to access ECB funds. Draghi affirmed this view a
few weeks ago. While the legal status of the ESM could still be tweaked,
it would be tough for Draghi to offer details today without facing a
credibility risk.

In either event, the ECB may not be able to deliver immediate
action but rather outline plans for the future. Draghi will face a
communication challenge to offer reassuring prospects while avoiding
raising expectations on which he may not be able to deliver in the near
term.

The credibility of any possible plan Draghi might present may not
only depend on the details, but also depend on the Bundesbank’s
reaction. The German central bank last Friday reiterated its opposition
to ECB bond market interventions and warned Wednesday said that the ECB
must not overstretch its mandate. Any public dispute may keep markets in
suspense especially before any program has been launched.

Whether or not any plan announced today “will be enough”, Draghi
has made clear he is willing to go all the way to hold the Eurozone
together, and for that he will likely find a majority on the Council.
Should today’s deal disappoint, and the debt crisis continue to
undermine confidence and economic activity, the ECB may still act
independently, embarking on QE in the face of downside price pressure.

On interest rates, the ECB appears rather unlikely to move again
just a month after cutting borrowing cost to a record low of 0.75%, even
if some observers argue that Draghi may push for a rate cut to deliver
immediate action on that front.

As ECB policy-makers continue to mull the option of a deposit rate
in negative territory, on this front too there may be more talk –
possibly signalling a rate cut for September – than action. Executive
Board member Benoit Coeure and Governing Council member Ewald Nowotny
have both said that the next move will require careful consideration and
that technical details had not been worked out.

–Frankfurt newsroom +49 69 72 01 42; Email: jtreeck@marketnews.com

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