Time to steady the nerves: Mario's made his plans

With the credit rating of the eurozone at risk from Moody's, Europe's leaders want to know if the ECB head can live up to his promises

Mario Draghi will be treading the finest of lines on Thursday when unveiling the European Central Bank's plan to shore up ailing government finances across the eurozone. Do little, and Mr Draghi is in danger of sending equity and bond markets into a fresh tailspin; promise too much, and the Germans will not write the cheque.

If "Super Mario" needed any reminder of how fine a line he is treading, it certainly came yesterday, when the ratings agency Moody's moved the whole eurozone's triple A credit rating on to a negative watch. Its reasoning? The key economies in the eurozone, such as France and Germany, are being dragged down by the eurozone crisis, while their governments are being exposed to more and more debt.

Despite Moody's downgrade threat, the recent news from the eurozone has been better, with equity markets moving upwards over the summer while crucial Italian and Spanish government bond yields go in the opposite direction, but this has all been dependent on Mr Draghi living up to his earlier promise that the ECB's plans "will be enough" to reassure markets that at last something is being done about the eurozone crisis.

Alan Clarke, an economist at Scotiabank, said: "Now is the time to see some meat on the bones. If Mr Draghi fails to unveil a coherent plan for dealing with the bonds of the likes of Spain and Italy, then all the good of recent times will be undone, which would be madness."

Markets seem to be of the same view. The minimum they are expecting is Mr Draghi to commit the ECB to buy the bonds of ailing eurozone countries, but unlike the last time the central bank went on such a spree, in 2011, there will be strings attached. For starters, the scheme is very likely to be limited to short-term debt – government bonds which mature in two or three years – as this will allow the ECB to get around claims that they are in effect funding national governments. The ECB is looking to bring a more precise weapon to bear – a scalpel rather than the scattergun of last year. It's hoped that by shoring up short-term debt, markets will be reassured that eurozone finances aren't going to go pop, which should help to reduce the cost of longer-term government borrowing, keeping the likes of Italy and Spain out of the danger zone.

"It's the size of the ECB's commitment to buy government bonds as well as the conditions attached that everyone will be watching," Philip Shaw from Investec said. "Make the conditions too strict and then the likes of Italy and Spain will not use the ECB's bond buying facility. Make them too loose and we may have a repeat of the past, when the ECB bought government bonds only for the national governments to go soft on their debt reduction plans," Mr Shaw added.

In advance of Mr Draghi's announcement, the yields on short-term Spanish and Italian bonds have slumped, as most anticipate these will be the main targets for the ECB bond buying scheme. If the scheme doesn't live up to these expectations, then it's likely that borrowing costs for the ailing eurozone members will rocket, perhaps to the levels seen in 2011, before the ECB's last major intervention. At that point the ECB would probably have to step into a panic situation, so action is better now rather than later.

As ever, though, the Germans have to be thrown into this mix. Europe's paymasters will only give the nod to the ECB's plans to buy the bonds of the likes of Italy and Spain at an EU leader's summit later this month if they feel that finally these governments won't use the ECB's intervention as a means to row back on austerity. But it seems that in Berlin there is at least an understanding that Mr Draghi must be allowed to get on with his limited rescue act.

Perhaps in need of a stiff drink or two, German Chancellor Angela Merkel told a meeting held in a packed beer tent in the town of Abensberg, near Munich, that after two years of political paralysis, now was the time for action. "It's not enough just to keep muddling through. These countries deserve our solidarity and that we root for them."

And the economic costs to Germany of doing nothing are mounting, with Scotiabank putting the cost of the eurozone crisis to its economy at about €50bn a year in lost output.

In an attempt to get their ducks in a row ahead of Mr Draghi's announcement, Ms Merkel welcomed the European president Herman Van Rompuy for talks yesterday, while the Italian premier, Mario Monti, laid out the red carpet for France's François Hollande.

Luca Jellinek, head of European interest-rate strategy at Credit Agricole, said there was now "broad agreement among these people. Many are realising that monetary policy is broken in Europe, badly broken."

Mr Draghi is capable of the spectacular. Late last year the ECB pumped €1 trillion into the European banking system to stave off a liquidity crisis, which had the handy knock-on effect of reducing government borrowing costs across the eurozone. This time around most analysts are expecting fewer fireworks from the ECB – with interest rates likely to remain on hold at 0.75 per cent – instead, just a coherent plan that will hold together would be nice. Mr Draghi's announcement, if it's what is expected, could eventually be seen as a staging post out of the eurozone crisis, but only if the Germans feel that the bad boys of the eurozone understand that this is not a "get out of jail free" card from austerity.

Arts and Entertainment
Gregg Wallace in Summer's Supermarket Secrets
tv All of this year's 15 contestants have now been named
Arts and Entertainment
Inside the gallery at Frederick Bremer School in Walthamstow
tvSimon Usborne goes behind-the-scenes to watch the latest series
Life and Style
A picture taken on January 12, 2011 shows sex shops at the Paris district of Pigalle.
newsThe industry's trade body issued the moratorium on Friday
Winchester College Football (universally known as Winkies) is designed to make athletic skill all but irrelevant
Life...arcane public school games explained
Arts and Entertainment
Could we see Iain back in the Bake Off tent next week?
tv Contestant teased Newsnight viewers on potential reappearance
Life and Style
Silvia says of her famous creation: 'I never stopped wearing it. Because I like to wear things when they are off the radar'
fashionThe fashion house celebrated fifteen years of the punchy pouch with a weighty tome
i100(and it's got nothing to do with the Great British Bake Off)
Angelina Jolie with her father Jon Voight
peopleAsked whether he was upset not to be invited, he responded by saying he was busy with the Emmy Awards
Bill Kerr has died aged 92
peopleBill Kerr appeared in Hancock’s Half Hour and later worked alongside Spike Milligan and Peter Sellers
news It's not just the world that's a mess at the moment...
footballPremiership preview: All the talking points ahead of this weekend's matches
Keira Knightley poses topless for a special September The Photographer's issue of Interview Magazine, out now
ebooksAn evocation of the conflict through the eyes of those who lived through it
The Ukip leader has consistently refused to be drawn on where he would mount an attempt to secure a parliamentary seat
voicesNigel Farage: Those who predicted we would lose momentum heading into the 2015 election are going to have to think again
Arts and Entertainment
Cara Delevingne made her acting debut in Anna Karenina in 2012
film Cara Delevingne 'in talks' to star in Zoolander sequel
Mario Balotelli pictured in his Liverpool shirt for the first time
Life and Style
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Data Scientist (SQL,Data mining, data modelling, PHD, AI)

£50000 - £80000 per annum + benefits+bonus+package: Harrington Starr: Data Sci...

SAS Business Analyst - Credit Risk - Retail Banking

£450 - £500 per day: Orgtel: SAS Business Analyst, London, Banking, Credit Ris...

Project Manager - Pensions

£32000 - £38000 Per Annum Bonus, Life Insurance + Other Benefits: Clearwater P...

KYC Analyst, Birmingham - £200-£250 p/d

£200 - £250 per day + competitive: Orgtel: KYC Analyst, Key Banking Client, Bi...

Day In a Page

Ukraine crisis: The phoney war is over as Russian troops and armour pour across the border

The phoney war is over

Russian troops and armour pour into Ukraine
Potatoes could be off the menu as crop pests threaten UK

Potatoes could be off the menu as crop pests threaten UK

The world’s entire food system is under attack - and Britain is most at risk, according to a new study
Gangnam smile: why the Chinese are flocking to South Korea to buy a new face

Gangnam smile: why the Chinese are flocking to South Korea to buy a new face

Seoul's plastic surgery industry is booming thanks to the popularity of the K-Pop look
From Mozart to Orson Welles: Creative geniuses who peaked too soon

Creative geniuses who peaked too soon

After the death of Sandy Wilson, 90, who wrote his only hit musical in his twenties, John Walsh wonders what it's like to peak too soon and go on to live a life more ordinary
Caught in the crossfire of a cyber Cold War

Caught in the crossfire of a cyber Cold War

Fears are mounting that Vladimir Putin has instructed hackers to target banks like JP Morgan
Salomé's feminine wiles have inspired writers, painters and musicians for 2,000 years

Salomé: A head for seduction

Salomé's feminine wiles have inspired writers, painters and musicians for 2,000 years. Now audiences can meet the Biblical femme fatale in two new stage and screen projects
From Bram Stoker to Stanley Kubrick, the British Library's latest exhibition celebrates all things Gothic

British Library celebrates all things Gothic

Forthcoming exhibition Terror and Wonder: The Gothic Imagination will be the UK's largest ever celebration of Gothic literature
The Hard Rock Café's owners are embroiled in a bitter legal dispute - but is the restaurant chain worth fighting for?

Is the Hard Rock Café worth fighting for?

The restaurant chain's owners are currently embroiled in a bitter legal dispute
Caribbean cuisine is becoming increasingly popular in the UK ... and there's more to it than jerk chicken at carnival

In search of Caribbean soul food

Caribbean cuisine is becoming increasingly popular in the UK ... and there's more to it than jerk chicken at carnival
11 best face powders

11 best face powders

Sweep away shiny skin with our pick of the best pressed and loose powder bases
England vs Norway: Roy Hodgson's hands tied by exploding top flight

Roy Hodgson's hands tied by exploding top flight

Lack of Englishmen at leading Premier League clubs leaves manager hamstrung
Angel Di Maria and Cristiano Ronaldo: A tale of two Manchester United No 7s

Di Maria and Ronaldo: A tale of two Manchester United No 7s

They both inherited the iconic shirt at Old Trafford, but the £59.7m new boy is joining a club in a very different state
Israel-Gaza conflict: No victory for Israel despite weeks of death and devastation

Robert Fisk: No victory for Israel despite weeks of devastation

Palestinians have won: they are still in Gaza, and Hamas is still there
Mary Beard writes character reference for Twitter troll who called her a 'slut'

Unlikely friends: Mary Beard and the troll who called her a ‘filthy old slut’

The Cambridge University classicist even wrote the student a character reference
America’s new apartheid: Prosperous white districts are choosing to break away from black cities and go it alone

America’s new apartheid

Prosperous white districts are choosing to break away from black cities and go it alone