The European Central Bank meets in Frankfurt Thursday amid market concerns that it might fail to meet expectations of new action to tackle the debt crisis following ECB chief Mario Draghi's pledge to do what it takes to safeguard the euro.
Analysts are not expecting the bank's 23-member governing council
to announce another a rate cut, after it delivered a 25-basis-point
reduction in borrowing costs to a historic low of 0.75 per cent at
its July meeting.
But Draghi's comments last week that the ECB would do whatever it
takes to protect the eurozone sparked market speculation that the
bank would stem the surge in borrowing costs in countries at the
centre of the crisis - notably Spain and Italy - by reactivating its
controversial government bond-buying programme.
Since then, Draghi's remarks have been backed by a round of
coordinated statements from key European political leaders, including
German Chancellor Angela Merkel, French President Francois Hollande,
Italian Prime Minister Mario Monti and the head of the Eurogroup,
Jean-Claude Juncker.
This has helped to fuel speculation that the ECB is planning to
link up with the European bailout fund, the European Financial
Stability Facility (EFSF), to help shore up vulnerable eurozone
members through buying bonds.
A week after Draghi's bold pledge it remains unclear exactly what
the ECB is planning.
Describing Thursday's gathering of the ECB's decision-making body
as the most-anticipated meeting in a long time, Commerzbank economist
Christoph Balz said: "Perhaps Draghi will pull a new rabbit out his
hat."
Analysts say the ECB could also chose to boost investor confidence
in the eurozone by rolling out another round of long-term cheap
loans.
German media reported this week that France and Italy are
spearheading a push to provide the planned permanent rescue fund, the
European Stability Mechanism (ESM), with unlimited financial
firepower by granting it a banking licence.
Many analysts remain sceptical about what Draghi will announce at
his press conference after the governing council meeting. He has
after all consistently said that it is up to governments to take the
lead in dealing with the crisis.
The scepticism also follows signs of the continued opposition from
the eurozone's biggest economy, Germany, and its powerful central
bank, the Bundesbank, to buying bonds and granting the ESM a banking
licence.
A banking licence for the ESM "cannot be our way," German
Economics Minister Philipp Roesler said Wednesday.
Draghi is to meet Bundesbank chief Jens Weidmann ahead of the ECB
meeting. Weidmann is a strong critic of the bond-buying programme.
Despite the risks of being isolated in Europe in the battle to
head off the crisis, Germany has argued that moves by the ECB to
purchase government bonds threatened to fuel inflation and compromise
the bank's independence.
It also believes that purchasing government bonds risked violating
the bank's charter by blurring its monetary responsibilities with new
fiscal duties.
In an interview published this week marking the founding of the
Bundesbank 55 years ago, Weidmann told an in-house journal that in
preserving its independence the ECB "had to respect and not overstep
its own mandate".
He also warned governments not to overestimate what the monetary
authorities can deliver.
Policy makers "overestimate the central bank's possibilities and
expect too much of it," he said.
Analysts have downplayed the outcome of the ECB meeting also
because of logistical issues.
"The ECB might not be able to deliver anything specific already on
Thursday, as it needs more time to coordinate with EFSF, Italy and
Spain," wrote analysts from Denmark's Danske Bank in a note to
clients.
"If we have learned one thing from verbal interventions it is that
the market impact will only prove sustainable if backed by action,"
they wrote.
In a reminder of the bleak economic backdrop to the meeting, a key
survey released Wednesday showed the eurozone's manufacturing sector
stumbling deeper into recession in July after its 11th consecutive
monthly contraction in industrial activity.
