Draghi under pressure to deliver on his ‘I will protect the euro’ promise

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 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.

Some 19 out of 24 money market traders said they expect the ECB to restart its mothballed bond-buying programme with purchases of Spanish and Italian debt.

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 policy tools such as outright asset purchases, or quantitative easing, which Britain, the US 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 to intervene and bring those governments’ soaring borrowing costs under control as the debt crisis deepens.

Reflecting the increased tension, US treasury secretary Timothy Geithner flew yesterday to Germany and met finance minister Wolfgang Schaeuble.

After their meeting, they issued a statement saying they were optimistic about reform efforts in the eurozone.

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 6% for the first time since April at an auction yesterday, but fresh turmoil is likely if Mr Draghi fails to convince investors.

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. Huw Pill, economist at Goldman Sachs and former senior ECB official, said the ECB could decide on Thursday to buy unsecured debt of bank or firms via the national central banks to address countries’ individual to keep risks contained.