European politicians have to deliver soon: UBS

Lueck also adds that at some stage the politicians have to make good their promises which will be possible only when the adequate mechanism has been established.

Below is an edited transcript of the analysis on CNBC-TV18.

Q: What can Draghi do? He has almost put his own credibility on the line. He would have had some reassurance from Berlin as was indicative from statements that came in on Sunday. So what are you expecting?

A: First of all I think this was coordinated. What Draghi said was followed-up by statements from Merkel and French president Hollande and then reinforced by Monti from Italy.

So, it looks very much like it was coordinated at the helm of European leadership. Secondly, Draghi can initiate the so-called Securities Markets Program (SMP) which was set up by the ECB in the spring of 2010 to purchase government paper from peripheral countries.

This program had been put on hold in February to be reactivated at a later stage. With regard to liquidity supply in the form of another LTRO, I think this would be of limited effect as there is not much collateral as for this kind of operation especially in those countries where liquidity would barely be needed. So my best guess is that the ECB would activate the SMP again.

Q: How much can he do in terms of using SMP money? What can it bring the yields to? Will that suffice an SMP programme?

A: I do not think that the ECB is aiming at pressing yields a lot lower in the peripheral countries. They are probably just trying to keep them in an area where they are now or slightly lower. I do not think they would try to get to something that would be long-term and sustainable, in a range of 3-4%.

I think they would rather try to keep markets from pushing rates even higher and even if rates had to be increased, it would be at a level that is sustainable even in the longer term.

The ECB would also make it totally incredible for markets to reinvest in peripheral bonds in these countries at some stage. So, it would create. for instance, a lot more damage, in my view, if the ECB allows peripheral yields, especially in Spain and also in Italy, to some extent to go to levels higher than 7.5% as seen in Spanish yields in the past week.

So, I would rather think that they would try to keep the yields in these countries at a level  which allows them to get finance in the medium-term, and would still leave markets some room to breathe.