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ECB to Curb Post-Summer Enthusiasm: Citi

With the summer break over in Europe, key economic data, political developments and central bank action could bring further disappointment.

European Central Bank
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European Central Bank

Valentin Marinov, head of European FX strategy at Citi, expects this week, and Thursday's heavily anticipated European Central Bank meeting in particular, to be disappointing.

“The fact that the ECB executive board cancelled their trip to Jackson Holelast week could mean there are still some difficulties to reach a compromise,” Marinov said in a research note.

Marinov is not confident that ECB President Mario Draghi will be able to satisfy financial markets on Thursday at a long-awaited press conference.

Draghi raised expectations in late July when he pledged to do whatever is necessary to preserve the euro.

Marinov does not think investors will be satisfied as the ECB is expected to reveal only part of its plan to stem the euro zone crisis, and that negotiations will continue.

“For example, given that the ECB will likely focus on purchasing short-term debt, the onus of any meaningful reduction of the Spanish and the Italian bond yields should fall on the EFSF — the original euro area bailout fund established in the summer of 2010 — and the ESM — Europe’s permanent rescue fund, when ratified by all euro zone members,” he wrote.

The decision on the legality of the ESM by the German Constitutional Court is scheduled for September 12. The ruling is regarded by some as a decision on Europe’s future. The EFSF is now down to about 248 billion euro ($311) of lending capacity after bailing out Greece, Portugal, and Ireland, according EFSF sources, and Spain and Italy are expected to be next in line to request a bailout, underscoring the need for additional firepower of the ESM.

The ESM is expected to replace the EFSF and allow for hundreds of billions of euros in additional lending to become available to ailing member states.

Marinov also touched on the capacity of the bailout facilities: “There is no clarity on how swiftly these will be able to intervene on the primary markets given that they have to raise the money needed for the bond purchases.”

“There is also less clarity on whether the combined firepower of the two facilities will be sufficient to make the firewall credible,” he said.

Marinov also highlighted that “it will take an official request for external assistance from the fiscally weak euro zone members to activate the firewall.”

“Judging from the latest euro zone headlines, Spain is in no particular hurry to do that.”

By Liza Jansen, special for for CNBC.com, twitter: @lizajansen

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