ECB President faces tests

EUROPEAN Central Bank President Mario Draghi was under intense pressure from investors, European leaders and even the United States to deliver yesterday on his pledge to do whatever it takes to save the euro.

Draghi faced the biggest test of his nine months' leadership of the central bank at its monthly policy meeting, w hich began at 0700 GMT. Any sign that he overplayed his hand when he made the bold pledge a week ago could see markets punish the euro zone.

"Draghi has unfortunately painted himself into a corner," JP Morgan analyst Pavan Wadhwa said in a conference call. "The ECB does need to demonstrate its credibility... Otherwise Draghi will lose face completely."

Reuters reported on Monday that the main idea under consideration is re-activating the ECB's bond-buying programme for Spain and Italy in tandem with the euro zone's rescue funds, but that action could be at least five weeks away.

Finnish Prime Minister Jyrki Katainen told an Italian newspaper European leaders were preparing for the euro zone's rescue funds to buy bonds on primary market for two years, with a decision likely in September.

German daily Sueddeutsche Zeitung reported the ECB was planning concerted action with the European Stability Mechanism (ESM) to purchase sovereign debt from Spain or Italy though a final decision was not likely until September.

The ECB has little margin for error to maintain its credibility and avoid bond yields climbing to unsustainable levels in the indebted countries on the euro zone periphery.

Katainen told Italian newspaper La Stampa: "We will make our proposal in September. So far what has been discussed has been using the ESM to buy bonds of countries in trouble on the secondary market, but I don't think that's the right solution.

"Last year the ECB did that and calmed the markets for a few weeks and then everything went back to how it was before."

He told another Italian newspaper, Repubblica: "We have to find the way to use the (ESM) more efficiently, for example by buying state bonds on the primary market. That would go straight at the problem, lowering spreads more strongly".

Market faith in the euro zone's crisis management efforts will be tested by a bond auction that could see Spain's borrowing costs rise further before the ECB's 1230 GMT post-meeting news conference.

Draghi said last Thursday that the political capital invested in the euro is often underestimated.

"Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough," Draghi told an investment conference in London.

Spanish and Italian bond yields fell markedly after Draghi's speech, and inaction could send them higher again.

Other countries, especially the United States, have sought to raise pressure on the ECB to act. US Treasury Secretary Timothy Geithner said the euro zone must take steps to bring down borrowing costs in troubled member states.

Reuters