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Mostly quiet on the euro front Monday, but there are some bits and pieces worth chewing over. To recap, ECB President Mario Draghi raised expectations that a big plan was in the works to save the euro. In short, Draghi's commitment to do everything necessary to save the euro was interpreted to mean that the ECB was prepared to act as a lender of last resort to bring down yields in struggling periphery nations.

There is an alternative explanation. Draghi was simply making some off-the-cuff remarks, saying things he thought he largely said before, and not intending to illicit the subsequent market response. If so, market participants may be set up for a phenomenal disappointment this week.

With that in mind, Spiegel says that Draghi dropped a bomb on other ECB members:

It was an illustrious meeting that British Prime Minister David Cameron was hosting on the evening before the opening of the Olympic Games in London...

...It was meant to be a day of glamour, but then Mario Draghi, the president of the European Central Bank (ECB), made a seemingly trivial remark -- but one that ensured that the 200 prominent guests were swiftly brought back to gloomy reality. His organization, he promised, would do "whatever it takes to preserve the euro."

The audience treated the remark as just another platitude coming from a politician. But International financial traders understood it as an announcement that the ECB was about to buy up Italian and Spanish government bonds in a big way. So they did what they always do when central banks suggest they might soon be firing up the money-printing presses: They clicked on the "buy" button...

...Meanwhile, experts at the central banks of the euro zone's 17 member states had no idea what to do with the news. Draghi's remark was not the result of any resolutions, and even members of the ECB Governing Council admitted that they had heard nothing of such plans until then.

This doesn't sound like Draghi has much time to build a consensus. Interestingly, Spiegel claims that the pressure on Draghi is becoming unbearable:

A deep-seated feeling of mistrust has taken hold at Frankfurt's Eurotower, the ECB's headquarters, and even Draghi, who is normally seen as the epitome of level-headedness among central bankers, has recently shown signs of nervousness. At a dinner in early July, the ECB chief and his fellow governors were discussing the question of whether the ECB's loans to Ireland's government-owned "bad bank" were consistent with the bank's current bylaws.

It was a debate among experts, like many before it, but then something unusual happened: Draghi raised his voice. Such questions, he snapped at his opponents, could not always be discussed in exclusively legal terms...

...The ECB president has become thin-skinned and easily irritated by criticism, especially when it comes from Germany.

Sounds like the ECB is coming apart at the seems, much like Europe itself. The story that Draghi was interested in downplaying "legal concerns" is particularly interesting. It suggests that he increasingly does not believe he can save the euro in the context of strict interpretations of the ECB's mandate.

As far as the timing of any action, I caught this in a Reuters report:

Both the ECB and the Fed are set to meet this week. The Fed will start a two-day meeting on Tuesday, with many economists believing the central bank will wait until September to provide more stimulus to a faltering U.S. economic recovery. The ECB's policy-setting meeting on Thursday is receiving more of the markets' attention after the bank's chief, Mario Draghi, pledged last week to do everything to save the euro.

But translating his words into action are particularly important given the threat the long-running euro zone crisis poses to the global economy.

Bold action by the ECB is at least five weeks away, insiders told Reuters.

I would really appreciate a little expansion on that last line. The longer timeline would not be surprising if the Der Spiegel report is correct and Draghi failed to build consensus before he spoke.

Finally, on the issue of convertibility and default risk, Joseph Cotterill at FT Alphaville says:

The ECB could now see a risk to its monetary policy - conducted in euros - from market pricing of peripheral bonds which assumes they won't eventually be paid back in euros. And it could now act on this risk. However it might do this and with whatever facilities, it feels conceptually different to the actions which the market largely expects, which are versions of credit easing or liquidity for sovereign debt (the SMP).

FT Alphaville sees this as more about convertibility than default risk, different than I suggested Sunday. I think though that we both agree this may be crucial to understanding Draghi's policy intentions. Cotterill also cites research on quantifying this risk, and thus what the ECB is prepared to do. maybe less than the market expects. I think following FT Alphaville on this subject (and many more, of course) is well worth the time.

Bottom Line: Seems like a lot of uncertainty heading into this ECB meeting, despite financial market participant's understandably crystal-clear interpretation of Draghi's now famous remarks.

Source: A Quick Euro Update