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Draghi’s Pledge Is Just ‘Political Posturing’: Expert

While European Central Bank (ECB) President Mario Draghi’s pledge to do what it takes to protect the euro zone from collapse sparked a rally in global markets, one expert calls it “political posturing” which may not be matched by bold action.

Mario Draghi
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Mario Draghi

Draghi’s comments on Thursday sparked hopes that the ECB would step in to help lower high borrowing costs in countries such as Spain and Italy, sparking a rally in their bond markets. Ten-year Spanish government bond yields fell overnight below 7 percent for the first time in a week.

Larry McDonald, Senior Director, Credit, Sales & Trading at brokerage Newedge, however, is skeptical about the intention behind Draghi’s bold message.

“Mr Draghi is a bond buyer but he just talked bonds up about six points. If you were going to buy Spanish bonds why would you talk them up and then buy them? It smells like a political posturing move,” McDonald told CNBC Asia’s “Squawk Box”.

“ECB QE (quantitative easing) and all primary market bond buys of Spanish or Italian debt are out of the question,” he added on Twitter.

According to McDonald, the ECB Chief is merely “challenging the market” and buying time until the new euro zone rescue fund, the European Stability Mechanism’s (ESM) banking license gets approved, which he forecasts will take place in the first quarter of 2013.

Such a license would allow the ESM to borrow from the ECB to purchase bonds, boosting its firepower without additional government funds.

In recent months, Spain’s government has been calling on the central bank to restart its dormant sovereign bond buying program - the Securities Markets Program - to drive down yields. The bank has spent more than $330 billion on such purchases since the program began in 2010.

Nouriel Roubini, professor of economics and international business at New York University agrees that the ECB’s willingness to act will be limited.

“Draghi's comments are partly verbal jawboning. Even if SMP (Securities Markets Program) were reactivated, markets would test ECB's very limited willingness to use it,” he said on Twitter.

By CNBC's Ansuya Harjani

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