FRANKFURT — European Central Bank president Mario Draghi gets another chance Thursday 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 Draghi 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 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.
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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.
Analysts say Draghi’s comments Thursday could be constrained by the fact that the bank may not have worked out every detail of its plans. Draghi has to strike a delicate balance: promise and reveal enough to keep markets happy, while making clear that further aid only will come if Europe’s politicians agree to do more.
Here is a look at what Draghi and the bank have been working on and what to look out for on Thursday:
Bond-buying strategies: By buying bonds on the open market — Draghi has said the bank 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 bank theoretically has no limit on the money it can use for its plan.
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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 bank’s 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.
Draghi will also have to keep governments in line if the bond-buying program is to succeed. When he announced his plan last month, he stressed that governments who want help must agree to certain conditions including approaching Europe’s emergency bailout fund for assistance and sticking to stiff deficit rules.
One weapon in the ECB’s arsenal could be halting the bond purchases, turning up the heat by letting borrowing costs rise again. This is a risky option. It would send a strong message to the countries being helped out but it could reignite market panic and send yields spiraling.
The only thing that’s certain about Thursday is that analysts and politicians will pore over every word uttered by Draghi. Rather than giving detailed plans about how the bank is ready to start bond-buying, Draghi is more likely give politicians another stern warning that they’ll have to abide by strict conditions if they want help.
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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 bank get going with its bond buying.