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European Central Bank President Mario Draghi will seek |
BY DAVID McHUGH
AP Business Writer
FRANKFURT, Germany
--European Central Bank President Mario Draghi gets another chance today to spell out how the bank intends to rescue the 17 countries that use the euro from financial disaster.Expectations have been high since late July when the ECB head vowed to do "whatever it takes" to hold the eurozone together. The following week, on Aug. 2, Draghi announced the broad outlines of a plan to buy short-term government bonds to help out eurozone countries struggling to manage their debt.
Until then, countries such as Spain and Italy had seen their borrowing costs--reflected in the interest rates on bonds they sell--rise to unmanageable levels. Investors were worried the two countries could soon get to a point where they couldn't afford to handle their finances and be pushed into asking for a bailout.
That has already happened three times in the eurozone--with Greece, Ireland and Portugal. The worry is that Spain and Italy are too big to bail out. If those countries fail to pay their debts on time, it could spark a financial crisis that could see the eurozone break up, spreading turmoil throughout the global economy.
Here is a look at what Draghi and the ECB have been working on and what to look out for:
BOND-BUYING STRATEGIES
By buying bonds on the open market--Draghi has said the ECB will target short-term bonds with maturities of up to three years--the bank can drive up the prices for a country's bonds. That brings down their interest rate--or yield--and makes it less expensive for countries to borrow money. The ECB theoretically has no limit on the money it can use for its bond-buying plan. As a central bank, it can "print money" to pay for the bonds by simply adding to banks' reserve accounts.
How much it spends on bonds sends a message to the markets. Too much and it could be criticized for violating its treaty provision that forbids it from financing governments directly. Too little and investors think that ECB is only half-heartedly attempting to solve the eurozone's problems. A previous bond-buying program started in May 2010 piled up over 210 billion euros ($264.16 billion) but was too limited to decisively lower yields.
POTENTIAL PITFALLS
Draghi has to tread a fine line--not only does he have to keep the markets from panicking and pushing bond yields even higher, but he also has to play a political game.
First he has to make sure that the ECB's 23-member governing council is on his side. The bond plan still needs to be passed by at the bank's policy-setting meeting, with a majority vote required but a broad consensus preferred in practice.
WHAT TO EXPECT TODAY
The only thing that's certain about today is that analysts and politicians will pore over every word uttered by Draghi.
Rather than giving detailed plans about how the ECB is ready to start bond-buying, Draghi is more likely to give politicians another stern warning that they'll have to abide by strict conditions if they want help. The pressure will be put back on leaders such as Spain's Mariano Rajoy and Italy's Premier Mario Monti to act first. Only after governments have applied to the eurozone's emergency bailout funds for help will the ECB get going with its bond buying.
