Central Banker Facing a Test

The following is an excerpt from an article in 

The New York Times
Wednesday, August 29, 2012

Central Banker Facing a Test

By LANDON THOMAS Jr.

LONDON — Mario Draghi, the president of the European Central Bank, has helped the euro zone survive August. But can he save September?

This month, Mr. Draghi stared down bearish international traders who were convinced that Europe’s common currency project would collapse.

“It is pointless to bet against the euro — it is pointless to go short on the euro,” Mr. Draghi said at a news conference on Aug. 2, a week after telling the world that the central bank would do “whatever it takes” to save the euro union.

Investors, or at least the ones venturing into the lightly traded markets this month, have taken heed.

Since Aug. 2, the euro is up 3.1 percent against the dollar. More notably, battered stocks and bonds in Spain and Italy have soared. The euro bears have rushed to close out their negative bets, and even some risk-averse traders have piled into assets they previously scorned.

But it will be September and not the lazy days of August that will truly test Mr. Draghi’s market-moving mettle. He will face severe pressure to provide specific details of his plan to shore up the euro zone’s weaker members by buying their bonds.

The first big test could come next week, on Sept. 6, when the bank’s governing council meets. Afterward, Mr. Draghi will again hold a news conference to try to explain whatever the central bank has or has not done. Bearish traders will be poised to pounce yet again on any signs of waffling.

Worries are also swirling that Germany will refuse to grant Greece the time and resources it is seeking to reduce its debt, something that could push it out of the euro currency bloc. Looming as well is the possibility that a decision from Germany’s Constitutional Court, expected on Sept. 12, will rule out German involvement in the region’s new bailout fund, the European Stability Mechanism.

The schism within German policy circles has been revealed in recent days. In an interview with the magazine Der Spiegel on Sunday, the head of the German central bank, Jens Weidmann, who is also on the European Central Bank Governing Council, fiercely criticized any intervention by the European bank in bond markets.

But on Monday, Jörg Asmussen, a German on the E.C.B.’s executive board who was a colleague of Mr. Weidmann in the government of Chancellor Angela Merkel, said during a speech in Hamburg that the bank had to buy bonds to stabilize European debt markets.

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