Frankfurt: The last time Mario Draghi addressed the news media after a meeting of the European Central Bank, on 2 August, he disappointed investors who wanted him to crack his whip and immediately bring bond markets to heel. The markets dropped even before Draghi was done speaking.

Only in subsequent days and weeks did the bond markets calm down, as investors evidently absorbed his underlying message: that the central bank intended to take meaningful measures against the euro debt crisis even if quick remedies were not possible.

But this Thursday, when the central bank meets again, Draghi, the bank’s president, could have a far harder time reconciling the expectations of twitchy financial markets with the limitations of his power. Although investors are counting on bold action, analysts say the bank probably needs more time to resolve internal differences and deliver on a promise to use its financial clout to tame runaway borrowing costs for the most troubled euro zone countries.

“Market expectation of Draghi's ability to manoeuvre may be exaggerated," said Marie Diron, a former economist at the central bank who advises the consulting firm Ernst & Young. “That could lead to a sell-off."

Some analysts do expect the central bank to cut the benchmark interest rate to 0.5% on Thursday, from its already record low level of 0.75%. Although that reduction might not impress investors as much as a bold intervention in the bond market, it could at least indicate Draghi’s commitment to his July promise of doing whatever it takes to preserve the euro.

The bank meeting is probably the central event, but not the only one, in what is likely to be a busy week for the euro zone. Political leaders will also continue making the rounds of one another’s capitals to plot crisis strategy.

One of the most closely watched meetings, also on Thursday, will take place when Angela Merkel, the German chancellor, visits the Spanish prime minister, Mariano Rajoy, in Madrid. Spain’s debt drama seems to have entered a dangerous phase, with some of the country’s biggest regions requesting financial aid from a central government already staggered by its own high borrowing costs.

Draghi at least temporarily mollified markets last week with an opinion piece in the German newspaper Die Zeit that was widely interpreted as signalling the central bank’s determination to begin buying the bonds of troubled euro zone governments, despite resistance from Germany. Exceptional measures may be required, Draghi wrote, “when markets are fragmented or influenced by irrational fears".

Top European Central Bank officials have indicated that they are working overtime to determine how best to keep borrowing costs for countries like Spain and Italy affordable. Draghi and other members of the bank’s executive board even cancelled plans to attend the annual meeting this past weekend of global central bankers in Jackson Hole, Wyo., saying there was too much to do in Frankfurt.

So far, the mere promise of central bank action has had an effect. Since spiking in late July, bond yields, a measure of a government’s borrowing costs, have fallen below 6% on 10-year debt for Italy and below 7% for Spain —levels considered acceptable, if not exactly comfortable.

But the yields, which have begun to edge higher again in recent days, are linked to expectations that Draghi will provide specifics of the ECB’s bond-buying strategy at the news conference on Thursday after the meeting of the central bank’s governing council.

Draghi is thought to have the support of most of the council’s 23 members. But he must contend with stiff and vocal resistance to bond buying from Jens Weidmann, the president of the German Bundesbank.

The Bundesbank declined to comment on Friday on a report in Bild, a German newspaper, that Weidmann had even threatened to resign in protest over the bond buying, a course of action that has become something of a tradition among disgruntled German central bankers.

The Bundesbank would only refer to an interview Weidmann gave to Der Spiegel magazine last week, in which he said, “I can do my job best by staying in office."

While Weidmann has been the only member of the governing council to object publicly to bond buying by the central bank, some others are likely to share some of his concerns. That group probably includes Yves Mersch, governor of the Central Bank of Luxembourg, and Erkki Liikanen, governor of the Bank of Finland. Spokesmen for the two men declined to comment.

These quiet dissenters may already have won concessions from Draghi that could constrain a new bond-buying program. For example, their objections may well be the reason Draghi said this month that any bond purchases would focus on short-term debt.

By buying bonds that mature in two years or less, the ECB would keep the pressure on countries to continue reducing debt and improving economic performance. Governments would know they needed to face investors again in a fairly short time.

The concern is that constraints imposed by Weidmann and others could dilute the effects of bond buying, rendering it less effective.

In any case, actual bond buying by the central bank is probably at least several weeks away. Draghi said in August that the central bank would intervene in bond markets only in concert with the new European Union rescue fund, the European Stability Mechanism, or ESM.

Countries would need to ask the rescue fund for help, Draghi said, and the fund would take the lead in bond buying, with the central bank providing backup financial support. But the fund, meant to replace a temporary bailout fund, is in legal limbo at least until the German constitutional court rules 12 September on a challenge to the country’s participation.

While many analysts do not expect the court to block Germany from taking part, some have warned of such a risk. “If the Court bans the German government from joining the ESM for now, this will likely have major repercussions for financial markets," analysts at Morgan Stanley wrote in a note to clients.

At the news conference this Thursday, Draghi will very likely need to finesse the difference between investors’ desire for instant gratification and the obstacles that remain before heavy-duty bond buying can start.

The questions on investors’ minds include whether the ECB will set upper limits on bond yields that it would defend at all costs. Probably not, analysts say, because it would be the equivalent of writing a blank cheques to the government issuing those bonds.

Investors will want to know, too, whether the central bank will continue to consider itself a preferred creditor, which raises the risk for other investors in the event a country defaults. Although the bank is expected to give up its privileged status in the debt market, that approach also carries risks. If the bank lost money on any bonds, taxpayers throughout the euro zone might ultimately have to replenish its reserves. That is one of the big concerns of Weidmann, because Germany is the bank’s biggest contributor.

©2012/The New York Times

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