The European Central Bank kept interest rates on hold today asPresident Mario Draghi waits for Spain to decide if it needs hishelp.

Policy makers meeting in Ljubljana, Slovenia, left the benchmarkrate at a historic low of 0.75 percent, as predicted by 48 of 52economists in a Bloomberg News survey. Four forecast a cut to 0.5percent. Draghi will brief reporters on the decision, taken at oneof the ECB's twice-yearly meetings outside Frankfurt, at 2:30p.m.

A month after Draghi unveiled an unprecedented plan to buy thebonds of euro-area countries still mired in the sovereign debtcrisis, Spain, the country most likely to take up the offer, isstill mulling whether it wants to accept the conditions attached.At the same time, the euro-area economy probably entered arecession in the third quarter as the crisis damped spending andinvestment.

“From an economic perspective, we don't need another ECB ratecut,” said Christian Melzer, an economist at Dekabank in Frankfurt.“The focus isn't on rate changes but on Spain and a possiblerequest for aid paving the way for the ECB bond program. It's up toSpain to make a move now.”

Spanish bonds extended losses today after an auction of two-,three- and five-year securities failed to exceed the maximum targetof 4 billion euros ($5.2 billion) and the benchmark three-yearyield rose.

Finance Minister Luis de Guindos has said officials are stillconsidering whether they need European Union aid, which Draghi hasmade a condition for ECB intervention. Under his plan, a countrymust make a formal request to Europe's bailout fund to buy its debton the primary market before the ECB considers buying bonds on thesecondary market.

Italian Prime Minister Mario Monti cautioned last week that aidshouldn't hinge on more conditions than leaders already signed upto and the International Monetary Fund shouldn't need to policeit.

“What people tend to forget is that the ECB's bond plan is onlycomplementing the implementation of financing help agreed by thegovernments,” said Athanasios Orphanides, who was an ECB councilmember until May and now teaches at the MIT Sloan School ofManagement in Cambridge, Massachusetts. “So if prime ministersRajoy and Monti are not happy about conditionality or IMFinvolvement, then they should take it up with their fellow leadersand not complain about the ECB.”

Bank of England

Spain's central bank governor, Luis Maria Linde, didn't attendthe ECB council meeting today due to an appearance before aparliamentary budget committee. Separately, the Bank of Englandheld its bond-purchase target at 375 billion pounds ($603 billion)and kept its key rate at 0.5 percent.

While the ECB waits on Spain, the euro-area economy isdeteriorating. Manufacturing contracted for a 14th straight monthin September and consumer confidence also declined.

The ECB last month forecast a deeper economic contraction for2012 than it did three months earlier, saying gross domesticproduct will drop 0.4 percent instead of 0.1 percent. According toa separate Bloomberg survey, a majority of economists forecast abenchmark rate cut in December.

Draghi is also seeking to sell his bond-buying plan in Germanyafter Bundesbank President Jens Weidmann objected to it. In a bidto soothe concerns in Europe's largest economy, Draghi pledged toGerman lawmakers on Sept. 25 that any bond buying must be“accompanied by reforms from governments that address deep-rootedissues.”

De Guindos said Oct. 1 that officials are studying the ECB planand will make the “best decision for the interests of the Spanisheconomy.” That followed the unveiling of a fifth austerity packagein nine months. The government announced plans to borrow 207.2billion euros next year, which would increase its debt load to 90.5percent of gross domestic product.

“The fears of the Bundesbank now seem to be coming true, thatthe governments are finding it very difficult to fulfill theconditions so that the ECB can act,” said Christoph Kind, head ofasset allocation at Frankfurt Trust, who helps manage about $20billion. “I think the ECB had imagined things would rundifferently.”

No Conditions, No Deal

While Spain seeks the lightest possible terms from creditorgovernments and the ECB as a reward for austerity measures alreadyimplemented, it's unlikely that Draghi will agree tono-strings-attached bond purchases, said Laurent Fransolet, head ofinterest-rate strategy at Barclays Plc in London.

“If you don't have conditionality, you don't have a deal,” hesaid. “It's very unlikely that the ECB will back down onconditionality. The markets know that, they also know that thiswon't happen overnight, and that a lot of sequencing isinvolved.”

The Spanish 10-year yield reached a euro-era record 7.75 percenton July 25, before Draghi pledged the next day to do “whatever ittakes” to safeguard the monetary union. It was at 5.88 percenttoday. Two-year notes were at 3.34 percent, up from as low as 2.71percent on Sept. 7.

Bond yields are unlikely to surge because the ECB's plan hasquelled investor concern for now, Fransolet said. “People are notgoing to short Spain if the ECB is only a phone call away.”

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