Will the financial markets be satisfied Thursday with more promises from Draghi?

09/04/2012 12:30 pm EST


Jim Jubak

Founder and Editor, JubakPicks.com

On Friday August 31 financial markets moved ahead when Federal Reserve chairman Ben Bernanke promised to do all that is necessary to support the U.S. economy. In his speech at the Kansas City Fed’s Jackson Hole conference, Bernanke didn’t announce any specific actions—no specific program of quantitative easing, for example—but the markets took his words to mean that if the economy continues to stumble the Fed will move.

This week the stage belongs to European Central Bank president Mario Draghi. The bank’s board of governors meets on Thursday September 6 and Draghi will speak shortly after that.

I don’t think Draghi has the same room to maneuver. He has already promised to do everything he can to preserve the euro, declaring that the currency is irreversible.

And when it comes to concrete actions Draghi is hemmed in by his own statements saying that the central bank will buy Italian and Spanish government bonds—but only after the countries involve ask for such program and after the permanent and temporary European bailout funds have made their own efforts. That’s a hindrance to any quick move by that European Central Bank since the permanent bailout fund, the European Stability Mechanism, won’t go into operation without German approval and the German constitutional court isn’t set to rule on its constitutionality until September 12.

Over the weekend Draghi told European leaders that he thinks the central bank could buy 3-year Italian and Spanish government debt without exceeding its mandate. (Buying 10-year or 15-year debt, on the other hand, would be a No, No, said Draghi.)

That leaves the bank open on Thursday to announcing its intention to buy 3-year government debt—with some conditions and on some timetable. Draghi could also announce the agreement in outline to expand the regulatory powers of the central bank—although Draghi and the German Bundesbank disagree about whether the ECB should regulate all European banks (Draghi’s preference) or just the biggest European banks (the Bundesbank preference.) He could announce a timetable and process for putting the European Central Bank in the bond buying business. And he could express support for keeping Greece in the EuroZone.

But it’s unlikely that he will be able to announce any concrete actions. And since he’s said pretty much all of what I’ve outlined above before, the question is Are the financial markets going to be happy with a repetition of Draghi’s promises?
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