The European Central Bank is under pressure to act on Thursday to help the euro zone contain a crippling debt crisis that has stoked contagion fears in the United States and Asia.
Hopes that the ECB will rush through new anti-crisis measures, such as expanding its government bond buying, helped the euro stabilise and lifted stock markets.
But the central bank risks disappointing markets if, as several analysts predict, it will only decide at its monthly meeting that its liquidity taps for euro zone banks will stay wide open and merely hint at more government bond purchases.
"The price action … adds to risk that the market may be disappointed with today's outcome," Citigroup currency and markets strategists said in a note.
Even European powerhouse Germany struggled to sell its bonds on Wednesday and Portugal's borrowing costs soared in further signs that last weekend's 85 billion-euro ($110.7-billion) EU-IMF rescue of Ireland and leaders' pledges to defend the euro at any cost failed to impress investors. [ID:nLDE6B018F]
European Union leaders appeared to pass the baton to the ECB.
Economic and Monetary Affairs Commissioner Olli Rehn said recent EU actions provided a sound basis for further stabilization steps by the central bank, and European Commission President Jose Manuel Barroso said he was confident the ECB would do whatever was needed.
"I'm sure the ECB is analyzing the current situation and that it will take the decisions necessary to guarantee the financial stability of the euro zone," he said.
Markets are now waiting to see how ECB President Jean-Claude Trichet will respond when he addresses the press at 1330 GMT on Thursday. Those most bullish expect to hear that the ECB will ramp up its government bond buying programme, launched in May after Greece was bailed out.
HINTS
But many market watchers expect no more than hints in that direction, saying it is too soon for any conclusive announcement given a fierce debate within the ECB about the merits of such action.
Influential Bundesbank head Axel Weber has called for the programme to be scrapped, and fellow ECB members have criticized the U.S. Federal Reserve's decision to buy $600 billion of U.S. debt.
"Thursday's meeting could send the first signal that ECB is on course for stepping up its purchase programme," RBS economist Jacques Cailloux said in a note to investors.
Yet ECB policymakers may feel under pressure to act faster, given growing concerns that the crisis could spread beyond Europe.
In Washington, the White House said President Barack Obama was briefed regularly on developments in Europe, while a senior Treasury official was heading to Berlin for talks on the economic situation after meetings on Wednesday in Madrid.
"It's important to the global economy and to our economic recovery," said White House spokesman Robert Gibbs. A senior G20 source in Asia also told Reuters that deputy finance ministers discussed the situation on Monday.
WHITE HOUSE CONCERN
A U.S. official also told Reuters that Washington would support boosting an EU rescue facility via IMF funds, news that bolstered the euro, helping it stabilize around $1.3130.
"It is up to the Europeans," the U.S. official said. "We will certainly support using the IMF in these circumstances."
However, a Treasury Department spokesman later said: "an extra commitment is not something we're discussing right now." A Japanese government official also said Tokyo believed the IMF had sufficient funds right now to deal with the European crisis.
In recent days, economists have urged the ECB to tear up its rule book and do all it can to protect the euro, particularly since governments seem to be running out of ideas how to restore confidence in their monetary union.
The premium investors demand to hold Portuguese , Spanish and Italian bonds instead of German benchmarks fell and European bank stocks rebounded on Wednesday.
Markets in Asia followed with Japan's Nikkei scaling a five-month high and markets elsewhere in Asia-Pacific climbing 1.3 percent.
Debt auctions in Portugal and Germany, however, showed investors remain nervous. Lisbon's borrowing costs surged in a 12-month bill auction and a German five-year note sale drew the weakest demand in half a year.
Citigroup's chief economist said this week euro zone turmoil might be the "opening act" of a global sovereign debt crisis that could infect the United States and Japan.
EU plans to make private bond holders bear some of the pain from any sovereign debt restructuring after mid-2013 have led investors to reassess the risk of putting their money in the government bonds of high-debt countries.
Euro zone officials have been admonishing markets for doubting in the currency bloc's ability to solve its problems, but with no unity among European governments about what to do, radical action by the ECB is among the few options left.
Germany has resisted pressure from France and others to turn the euro zone into a "fiscal union," a step that could help the bloc address its economic imbalances but require members to sacrifice sovereignty for the good of the group.
Chancellor Angela Merkel is also reluctant to top up EU's bailout funds at the expense of German taxpayers, while Berlin's partners are clamouring for more.
Portuguese Treasury Secretary Carlos Pina told Reuters the EU needed to "deepen its budget and create a European Treasury" to defend the euro, a move that would be anathema to Berlin.
