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Europe's financial crisis: Waiting for ECB to ride to the rescue

European Central Bank president Mario Draghi will lay out a plan Thursday on how the continental bank will address current fiscal issues.

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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 ECB's 23-member governing council is on his side. This might not be easy when Germany's central Bundesbank — an influential member of the council because of the size of Germany's financial commitment to the eurozone — has so far been critical of the bond purchase plans. Its head, Jens Weidmann, has warned that governments could become addicted to the help and avoid making unpopular spending cuts and tax increases to get their debts under control.

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Draghi will also have to keep governments in line if the bond-buying program is to succeed. When he announced his plan last month, Draghi stressed that governments who want help must sign up for a to-do list of conditions. But once the ECB has stepped in, will countries stick to their commitments after the pressure has been taken off their finances? The history of the eurozone crisis is littered with broken promises and missed targets.

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.

Economists have suggested Draghi may push for a tough version of enforcement. That could involve bringing in the International Monetary Fund to monitor a government's progress.

"Everyone loves a generous central banker... There's a tight balancing act here, in which the ECB should provide a safety net, but not give too much away for free," wrote Rabobank analyst Jan Lambregts in a note to investors.

—WHAT TO EXPECT THURSDAY:

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 ECB is ready to start bond-buying Thursday, Draghi is more likely to lay down the law. Politicians will probably be given another stern warning that they'll have to abide by strict conditions if they want help. The pressure will be put back on leaders such as Spain's Rajoy and Italy's Premier Mario Monti to act first. Only once governments have applied to the eurozone's emergency bailout funds for help, will the ECB get going with its bond buying.

While the focus of attention will be on what the ECB president will — and will not — say about the bank's bond-buying program, the ECB could also use another measure to help strengthen the eurozone's finances — interest rates. Economists are divided on whether a quarter-point cut in the ECB's benchmark interest rate to a new record low of 0.5 percent might be on the cards.

Analyst Carsten Brzeski at ING said that "not all the detail might be revealed this week, perhaps because there is not yet full agreement within the governing council, but maybe also to keep pressure on" indebted governments in southern Europe.

Jacques Cailloux, chief European economist at Nomura International, said he expects Draghi to give "almost no detail" on Thursday. Instead Draghi will assure markets that the ECB "stands ready to intervene and to reiterate that this will only come when the call for help has been made."

Draghi's remarks will be "with a view of keeping maximum flexibility and reflect that they might not be fully prepared just now, and to not get cornered with very specific targets."

IN PICTURES: Europe in crisis

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