NEW YORK —
Now the president of the European Central Bank faces the much more complicated task of delivering on last week’s promise to do ‘‘whatever it takes to preserve the euro.’’
He will have a chance to give substance to that bold statement Thursday when the bank’s governing council meets. With expectations so high, anything short of a decisive display of financial firepower could send financial markets back to the panicky behavior of only a week ago, when the thin trading of summer was exaggerating stock market gloom and bond investors were bidding up the borrowing costs of Spain and Italy to potentially destructive levels.
Draghi’s vow last week and his assurance that ‘‘it will be enough’’ sent stocks up worldwide and drove Spanish borrowing costs down from their lofty levels. Investors concluded that Draghi was signaling a major policy action, like huge purchases of government bonds to raise demand for debt from Spain and Italy and keep their borrowing costs at sustainable levels.
Nearly identical statements by Chancellor Angela Merkel of Germany, President Francois Hollande of France, and Prime Minister Mario Monti of Italy in recent days further raised expectations, though it was unclear if they all had the same policies in mind.
Controlling the bond market may not be as simple as it sounds, though, even for an institution that has the power to print money. Nor, analysts said, are there many other easy or effective options for the European Central Bank, which serves the 17 European Union nations that use the euro.
Under its charter, the ECB faces more restrictions on its ability to buy government bonds and stimulate the economy than the Federal Reserve does. Although the ECB is supposed to defend price stability above all else and is barred from financing governments, the Fed’s mandate puts more emphasis on promoting employment, and it has bought hundreds of billions of dollars’ worth of Treasury securities.
But even the Fed, whose policy making committee meets Tuesday and Wednesday, is struggling to find ways to help the economy when its main tool, managing a benchmark interest rate, is close to zero. And the ECB’s benchmark interest rate, which has been cut three times since Draghi took his post last fall, is at a record low, at 0.75 percent. But in Europe, those low rates have not been passed on to businesses and consumers in countries like Spain and Italy because their banking systems are dysfunctional.
“They are in regions below 1 percent where the interest rate is basically impotent,’’ said Jeffrey Bergstrand, a professor of finance at the University of Notre Dame in Indiana and a former economist at the Fed. ‘‘The only thing that can help is fiscal stimulus,’’ he said — in other words, government spending by countries like Germany that can afford it.
That may, in fact, be the message Timothy F. Geithner, the Treasury secretary, delivers Monday when he meets his German counterpart, Wolfgang Schaeuble, on the resort island of Sylt, off the German coast.
The United States has repeatedly pressed eurozone governments to be much more forceful in battling the crisis, which has been a drag on the global economy.
The European Central Bank has bought bonds before, under a program begun by Jean-Claude Trichet. But that ultimately failed to hold down borrowing costs for countries like Spain because the bank did not commit enough money or show enough determination. Any new round of bond-buying would have to be more impressive.
‘‘What can they do and what would bring about a sustained turnaround in market confidence?’’ said Jacques Cailloux, chief European economist at Nomura in London. ‘‘There I struggle to find something that would really be convincing.’’
In theory, the ECB could cap bond prices simply by declaring that it would not tolerate market interest rates for Spain above, say, 7 percent. Any speculator who might want to bet against Spanish debt would confront the risk of big losses if the ECB bought bonds in grand style on the open market to drive down yields, the effective interest rates.
If the threat was credible enough, the bank might not actually have to carry it out.
That, however, is where the task becomes more tangled. For the ECB to be sufficiently intimidating, it would have to violate some existing taboos.
For example, it would have to abandon its practice of offsetting its bond purchases by taking in equal amounts in commercial bank deposits. By absorbing deposits, the bank takes as much cash out of the system as it puts in via bond purchases. By keeping the supply of money in the economy approximately even, it tries to avoid the appearance that it is printing money.
But the bank has struggled some weeks to attract enough interest-earning deposits from commercial banks to cover the bond purchases it has made, valued at $260.7 billion.
The European Central Bank would also probably have to stop treating itself as a privileged creditor, something it did this year during the Greek bailout. By refusing to absorb losses on Greek bonds, as private creditors were forced to, it may have unintentionally raised borrowing costs for other troubled countries. Investors concluded that if any country could not meet its obligations, private creditors would once again bear all the pain.
A decision to accept losses on the bank’s holdings of Greek bonds would be a significant policy shift, though, and raise other difficult questions.