FRANKFURT— European Central Bank chief Mario Draghi faces the most decisive moment of his presidency on Thursday when he aims to back up his vow to save the euro with a bond-buying plan, the main focus of a policy meeting where it kept interest rates on hold. Investors want to hear how the ECB will start the new bond-buying programme to help bring down the borrowing costs of Spain and Italy, after disagreements between bank policymakers over the plan were played out in public last week. With the bond-buying plan the focus of Thursday’s meeting, the ECB Governing Council kept interest rates on hold, leaving its main rate unchanged at 0.75 per cent. “A rate cut would have been understandable given the weak economic data, but clearly the ECB wants to address the main risk first, the convertibility risk, which the ECB will try to attack with a new bond purchase program, if governments play along,” said Stefan Schilbe, chief economist at HSBC Trinkaus.
The euro rose after the rate decision and German benchmark bond prices fell. Pressure on Draghi intensified after an unsubstantiated German newspaper report that Bundesbank chief Jens Weidmann had considered resigning over his opposition to bond-buying, although several sources say he has made no such threat and believes in staying at the table to argue his case. Renewed ECB intervention in the euro zone’s bond markets is crucial for buying governments time to come up with a longer-term response to the bloc’s debt crisis. Investors are looking for Draghi to flesh out enough details of the plan to back up his promise on July 26 to do “whatever it takes” to preserve the euro when he speaks after the Governing Council meets. “Expectations are extremely high. If the ECB does not deliver, we will get into another bad patch,” said Gilles Moec, senior European economist at Deutsche Bank.
Spanish and Italian government bond yields have fallen significantly since Draghi said on August 2 that the ECB would buy bonds issued by Madrid and Rome. ECB debt purchases, which would succeed the bank's Securities Markets Programme that has been dormant since March, would only resume under strict conditions and if countries first sought help from the euro zone rescue fund. Markets have been expecting Draghi to unveil a bold plan after Thursday’s policy meeting. But while he is likely to deliver a framework for new bond purchases, he will give no details of planned amounts or explicit targets for yield spreads or levels of interest rates, two central bank sources told Reuters. “A number of investors expect that the button will be pushed without further ado, but it is a bit more complicated than that,” Deutsche Bank’s Moec said. (Reuters)