September 5th, 2012
08:04 PM GMT
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Ten months into his eight-year term, the man hailed as ‘’Super Mario’’ is facing his biggest test yet.

And though the outcome of the European Central Bank’s latest meeting is by no means a given, what’s sure is his words will resonate far from the region’s shores.

Now into its third year and counting, the single currency’s funding crunch has claimed the scalps of three eurozone countries so far and threatens to engulf others which are ‘too big to bail’ but too big to fail.

What started as a financial crisis has morphed into an existential one and left ECB President Mario Draghi to fill the vacuum of leadership left by the eurozone’s squabbling politicians.

While the ECB will formally be contemplating its interest rate policy on Thursday, Draghi’s most pressing task will be far less mundane: instead investors are relying on him to keep the next troubled members solvent, even if that means creating an artificial market for their debt.

As such, the bets are on that the ECB boss will announce plans to buy up the sovereign debt of the eurozone’s peripheral nations, like Italy and Spain, to bring down their bond yields and cut their borrowing costs.

Indeed, in July the 65 year-old Italian seemed ready to deliver, swearing he would “do whatever it takes” to save the euro.

By August however markets were left hanging with scant details of any future grand plan.

So now, once again they wait with bated breath.

But some say there’s a very distinct possibility traders may well go home disappointed.

Danny Gabay, a former Bank of England economist now director at Fathom Consulting, believes any announcement by Draghi will be short on details.

What’s more: the ECB’s bond purchases are unlikely to occur without some form of conditionality. "This by itself may produce further political wrangling and brinkmanship,’’ he says.

Either way, if the ECB does go ahead and unveil asset purchases here is what other economists will be looking for:

• Volumes unknown. The size of the scheme will probably be left deliberately vague with no limit imposed. If there’s anything central banks have learned it’s that playing the numbers game with markets is a dangerous business.

• No Public Yield Targets: For the same reason it’s unlikely the ECB will publish the yield it will try to get Italian and Spanish bonds down to. Although Draghi will almost certainly have his own internal objective, Citigroup says it’s improbable this will be made public.

• Sterilized Purchases: Most economists agree the bank will neutralize the risk of the transactions by mopping up the extra liquidity they create. This would help it avoid criticism from some member states, particularly those concerned about spurring inflation, like Germany.

• Short Maturity: Another reason why Draghi has found his scheme a hard sell is because of fears it will reduce the impetus for weaker members to rein in their deficits and implement reforms over the longer term. For this reason purchases of 3 year bonds –rather than say 10 or 30-year securities – could be a more palatable compromise to maintain the urgency of balancing the books.

But here’s the catch: all of the above assumes Draghi actually has the right to ride to the rescue and save the day.

Notoriously narrow, the ECB’s mandate is technically only to keep prices stable across the bloc’s 17 nations at or around a pre-determined level of 2 percent.

As an independent institution, the bank is not authorized to dictate fiscal policy only rather react to it and critics say Draghi’s promises have already overstepped the mark.

As UK Chancellor of the Exchequer from 1983 to 1989, Nigel Lawson presided over an eponymous economic boom during the Thatcher years before the Bank of England was independent.

This week he told me Draghi’s reported bond-buying would be illegal and risked undermining the entire ECB as an institution.

Lawson says that default is inevitable for some eurozone states and instead of trying to prop up the ailing monetary union, leaders should be looking for ways to dissolve it.

‘’The idea of Mario Draghi saying ‘’the euro is irreversible’’ is one of the most stupid statements that has ever been made,’’ he says. ‘’Nothing, is irreversible. Nothing.’’

Then again as my economics professor always told me: “Never talk in absolutes.”

soundoff (18 Responses)
  1. Evolution

    "is facing his biggest test yet"

    How is he facing his biggest test yet "Nina dos Santos"

    Interests on bonds even for Italy and Spain has already dropped below 7%
    Support for Spanish banks have already been shored up
    A Strong Central Banking authority for the Eurozone has already been approved and is in the making
    EFSF is already here and ESM is about to be approved
    Countries like Ireland are improving again
    The EU has already gained more powers to oversee budgets and force penalties

    When are you going to do stories about the 16 Trillion Debt level the US achieved yesterday? Or articles about the coming US Fiscal Cliff. Or the Fact that Total EU debt is 83% while total US debt is already at 104% of the Economy. And while the US hasn`t yet made any cuts or reforms to start living within their means again. How about the 50 Million Americans now using Food Stamps.

    No, you only do articles claiming the Euro will collapse, everything is panic and chaos in Europe. A total lie and you know it. You have been doing this for years but every time the Euro does not collapse. The Euro has been rising again for the past months against the Dollar. But even here you only do stories if the Euro drops in value. But no stories when the Dollar drops against the Euro. That is called propaganda and you know it. Stop going beyond news and just stay away from personal (and highly biased) opinions. That`s not news by any standard.

    September 5, 2012 at 8:51 pm |
  2. Finn

    Nothing will change in EU. Same old story:

    The mediterranean countries are broke as usual but no worries, thank god there are countries that do take care of their economies, so let's send the bill to them. They will pay. Hey, they have to. It's their money at stake as well as we're in this together.

    It's like countries such as Germany, The Netherlands and Finland would have kids named Spain, Italy and Greece who party away in Las Vegas and then send the credit card bill to mom and dad.

    How nice!

    September 6, 2012 at 3:42 am |
  3. Robert Powell PhD

    What a complete FRAUD and FARCE Merkel, Hollande, the EU, IMF, ECB and Dragi are: The EU and all its criminal politicians who created this entire financial mess have gone "Scott-free" without any one of them being held accountable or found guilty of fraud, theft and incredible misdeeds!

    Nothing will change in the EU wth its corrupt politicians and Bankers and they will continue stealing EU citizen’s money, making the People the only ones responsible. Why has the EU Commission never asked Greek Politicians about the 200 billion Euros they have looted from the people and EU funds they stole and sent offshore and to Swiss banks?

    Because the Bankers & EU Commission is in on this game and absolutely corrupt… It is Pathetic... Time to tear the system down and start over... Stop voting for these horrible Criminal Politicians & jail the Bankers for financial fraud & get back citizens money!

    September 6, 2012 at 5:13 am |
  4. Drinking Coca cola.

    Disregard the comments from Chinese trying to discourage the West (US and Europe especially) from recovering their eocnomies. Down with China, I hope a comet hits that place.

    September 6, 2012 at 8:41 am |
  5. Matteo

    When i read stupid comments as the ones from Lawson about the dissolution of the monetary union, as a proud continental european, I really enjoy knowing Brits like him are, and always will be, a channel of water away from real Europe.

    September 6, 2012 at 10:02 am |
  6. Angry Bird

    If you want to see how the euro can destroy a country, just visit Greece, Portugal or Spain and talk to the people. The German Finance Minister is saying that things are going very well in Portugal. This is just a big, fat lie...

    September 6, 2012 at 11:17 am |
  7. Angry Bird

    Matteo, you don't agree with Lawson because you are in denial. It happens all the time.

    September 6, 2012 at 11:21 am |
  8. Citizens in fight!

    German goverment will spread the idea of "the Great Germania" around Europe. They lost the WWII but we are at war with Germany with his economy-blitz idea. Next time they will try to sew a yellow star (oh, sorry a euro symbol!) in the mediterranean citizens suits.

    September 6, 2012 at 11:36 pm |
  9. craig

    Thought this was going to be an article on a new Super Mario video game. Thread is very misleading.

    September 7, 2012 at 5:20 am |
  10. Voice of reason

    In the end, it's very, very simple: Germany among the few other AAA Euro countries are simply fed up paying the bills of others.

    Considering how much money Germany has poured into Euro, not suprised they want more power. As a citizen of a Eurozone AAA country all I can say is, better Germany in charge than Italy or Spain.

    September 7, 2012 at 9:51 am |
  11. Johannesd

    Sorry guys, the ECB does what it promised. Time to turn in your 'end of the Euro club' membership cards. Next in line for the financial headlines : the US and the 'fiscal cliff'.

    September 7, 2012 at 11:58 am |
  12. pedropt

    it is impossible to save Europe when FMI and BCE loans money to countries at higher interest rates .
    Monetary found and European central Bank finality are only to put countries on cheap sell with they economic measures .
    People dont need to be much smart to understand that , they only need to watch the news .
    Sooner or later Europe economy will colapse , there is no salvation to it when only Germany and France throw the rules to what it fits better for they interests .

    September 7, 2012 at 8:33 pm |
  13. benevolent

    EC and ECB mind-control many politicians and business people in Europe. They
    manipulate financial markets, require high interest rate, require low-price
    This is done with small implants in the head (sometimes involuntary)and
    wireless technology. Essentially a sensor is connected to nerves and the brain
    teaches itself to recognize the single in this way the thoughts of a person
    can be received and also send to him/her. I found such device implanted in my
    sinuses with FMRI. I studied at CEU – sponsored by Soros, and Rostowski, the
    financial minister of Poland was teaching there (he is also mind contolled).
    Behind Soros, actually are EC and ECB – the owners and beneficiaries of the
    technology. It is not done for security, because I worked for the Bulgarian
    National Bank and I was threatened with this technology to make credit
    expansion for the bank cartel (CEU is teaching the central banks in CEE this
    I also met Papademos at a Austrian Central Bank Conference, while he was in
    ECB, and I believe he is also mind-controlled. It is probably that EC and ECB
    will use the latest technologies to send some Greece financial minister in the
    hospital as they control his mind – everybody is aware for the latest
    technologies. It is the behavior of EC and ECB that should be clarified -
    they would do anything for the billions Greece own them – but crimes should
    also be punished. It is not a union, but a brutal mafia raising their
    capital. The same is valid for Mario Monti.

    September 7, 2012 at 8:45 pm |
  14. peder

    I sincerely hope that the EURO and the EU state collapse.

    Its a project without the support of the population of Europe.
    The political people build EU with lies and so to speak tricked the populations to vote yes to something the marioty wanted.
    Nobody want a "super state" we want to keep our national states and only work together on a few other commond things such as trade and some coorporation.

    I actual wonder if we won or lost ww2. The EU project is an " utopia project"

    September 8, 2012 at 9:42 pm |
  15. Roelof

    They're more busy trying to figure out if the new ECB boss should be a man or a woman, instead of the best candidate. For short, there is no crisis.

    September 9, 2012 at 7:53 pm |
  16. ahmed

    Stronger online games full, free
    اقوى مواقع الالعاب الكاملة والمجانية

    September 17, 2012 at 2:55 pm |
  17. super mario racing games

    Wow, superb weblog layout! How lengthy have you been blogging for? you made running a blog look easy. The total glance of your site is excellent, as neatly as the content!

    December 8, 2012 at 8:42 am |

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