The month's main event comes Sept. 6 when Draghi convenes his Governing Council, after declaring Aug. 2 that it's “unacceptable” for investors to bet against the euro's future by elevating bond yields. Draghi said that may spur the ECB to buy short-dated bonds in the secondary market, albeit only in concert with direct purchases from governments by Europe's rescue fund, with accompanying economic conditions.

“Unlimited intervention by the ECB in the bond markets would be the ultimate game-changer in the euro zone debt crisis,” said Steven Major, global head of fixed income research at HSBC Holdings Plc in London. “Not only would it drive spreads down, it would keep them down.”

Keeping the yields of peripheral nations within a preset range of those of core economies could require the ECB to spend as much as 7 billion euros ($8.8 billion) per week buying bonds, Major estimates. The gap between two-year German and Spanish bonds could almost halve to 200 basis points from more than 370 currently, he said.

The ECB “will always act within the limits of its mandate,” Draghi wrote in a commentary for German newspaper Die Zeit provided by the Frankfurt-based ECB yesterday. “Yet it should be understood that fulfilling our mandate sometimes requires us to go beyond standard monetary policy tools.”

Steering Yields

While speculation has mounted the central bank may try to cap bond yields outright, Goldman Sachs Group Inc. economist Huw Pill predicts it will avoid explicit targets for rates or spreads and instead try to steer market yields within wider bands depending on economic performance.

The central bankers may even hold fire. ECB Executive Board member Joerg Asmussen said Aug. 27 that the bank shouldn't buy bonds before the rescue fund intervenes. Two officials said last week it may even hold off furnishing full details of its plan until Germany's Constitutional Court rules on the legality of the European Stability Mechanism.

So Sept. 12 provides investors with two flashpoints, the German court ruling and a Dutch election. The ESM cannot operate without Germany's say so and its 500 billion-euro cash pile is needed if Europe is to have enough cash to recapitalize banks and support Spain and Italy.

Joachim Fels, the chief economist at Morgan Stanley in London, says even if the court sanctions the ESM, it may attach conditions which limit the German government's ability to pursue deeper European integration in the future. “Given the rise of euro-skepticism in Germany and elsewhere, markets would likely take such a verdict by the court as a bad sign,” he said.

Jostling for investors' focus the same day is the Netherlands election. In polls, a third of voters back the Socialists, who oppose more spending cuts and refuse to hand over more sovereignty to Europe, or the Freedom Party, which seeks an exit from the European Union and the single currency. It could take months for a coalition to be formed.

European finance ministers will meet Sept. 14-15 in Cyprus with Greece, Europe's original problem child, still under the microscope. After two bailouts totaling 240 billion euros, the nation is struggling to qualify for the next installment, raising the risk of a second default and even a possible euro exit.

With his economy plagued by an austerity-driven fifth year of recession, Prime Minister Antonis Samaras wants more time to meet the rescue terms. Possible concessions floated in Germany include front-loading aid, lowering the interest rate or extending maturities on loans and extending debt write-downs to public holdings such as the ECB's.

The so-called troika — the ECB, European Commission and IMF — return to Athens early next month to study how much of a funding shortfall Greece faces. While asking for an extension in its fiscal adjustment program by two years to 2016, the government is trying to show its dedication to the troika's demands by pulling together a new package of spending cuts for the next two years.

“With some German flexibility, Greece may survive this September,” said Christian Schulz, an economist at Berenberg Bank in London, who reckons the probability of a Greek euro exit has eased to 35 percent from almost 50 percent earlier this month. “But the pressure remains on Greece to take ownership of the reforms and deliver results.”

ECB Faith

Economists at Citigroup Inc. are less confident, saying last week they view a Greek departure in the next six months as “increasingly likely” and possible as soon as next month should the troika decide the government hasn't done enough. A decision on whether Greece needs more aid may still not come before October, Luxembourg Prime Minister Jean-Claude Juncker said last week.

The Cyprus talks will also review a first slate of European Commission proposals to forge a euro region banking union, with common supervision for lenders and pooled funds to deal with crises. The plans, which the Brussels-based commission has earmarked for publication on Sept. 11, include a draft law to hand supervisory powers to the European Central Bank, a refurbishment of the European Banking Authority and a policy paper setting out the rest of the banking union project.

Euro area leaders said in June that legislators should study the supervisory plans “as a matter of urgency.” The commission's intention is that they would enter into force in early 2013.

Investors may be placing too much faith in the ECB and in the ability of governments to soothe their fiscal stresses in a 17-nation bloc still lacking economic union, said Neil Williams, head of economic research at Hermes Fund Managers in London, which oversees about $46 billion.

“There's a bit too much optimism that the euro zone can solve itself in September,” said Williams. “This is going drag into next year and beyond.”

Copyright 2018 Bloomberg. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.