Brussels, 09/2012 (Agence Europe) - On Thursday 6 September, the president of the European Central Bank (ECB), Mario Draghi, gave details of how the ECB's purchase of sovereign debt of struggling eurozone countries unable to raise funds at decent interest rates on the market would work. He laid great emphasis on the strings attached to the purchase, to be known as “Outright Monetary Transactions” (OMT). Member states would first have to submit to a structural adjustment programme and request and obtain aid from the EFSF or ESM (the eurozone's bailout funds). The OMT plan was approved unanimously on Thursday, apart from the Bundesbank of Germany, which is hostile to what it sees as monetarisation of public debt, which is banned by the EU treaties. The ECB decided to keep eurozone interest rates unchanged.
“As announced on 2 August 2012, the Governing Council of the European Central Bank (ECB) has today taken decisions on a number of technical features regarding the Eurosystem's outright transactions in secondary sovereign bond markets that aim at safeguarding an appropriate monetary policy transmission and the singleness of the monetary policy”, said Draghi after the ECB meeting attended by Euro Commissioner Olli Rehn and the head of the Eurogroup, Jean-Claude Juncker (see EUROPE 10669). He said “the OMT objective is to address severe distortions in government bond markets which originate from, in particular, unfounded fears on the part of investors of the reversibility of the euro” and was strictly in sync with the ECB's mandate because the bank would only buy bonds from the secondary markets (not from countries directly) and the ECB's terms and conditions allow it to use the purchase of public debt as a monetary policy tool.
OMT. Draghi said that the ECB would lose its independence if there were no strings attached to the OMT. Member states would have to cut public spending and introduce structural reforms and would also have to manage the cash granted by the EFSF/ESM. A necessary precondition for benefitting from OMT buy-ups would be the introduction of an austerity programme. Austerity programmes would be full macroeconomic adjustment programmes or, for simply the announcement of a line of credit, preventative economic programmes, which would have to include the intervention of EFSF/ESM on the primary debt market. Countries already subject to a structural adjustment (Ireland and Portugal, for example) would be able to benefit from OMT from the point at which they start borrowing again from the money markets directly. The ECB says intervention from the IMF in the above-mentioned programmes would be desirable.
The ECB has not put any cap on the sums involved. It will end the OMT when the desired objective has been reached or if the country in question breaks its commitments. In practice, the ECB would buy up sovereign debt of maturity of up to three years, a maturity that is considered to be in line with other ECB interventions, like the two “LTRO” low-cost loan issues to banks at the end of 2011 and early 2012. Cash used to buy up sovereign bonds would be “sterilised” in the sense that equivalent cash would be withdrawn from the market despite the fact that this might rebound negatively on the lending markets and hence on the real economy. The OMT operations would be highly transparent as each week, the ECB would make public the value of the bonds bought and each month, would publish country-by-country details of bonds and their maturity dates.
“No seniority”. The ECB explained that it has not set any thresholds for the launch of OMT. Draghi said that a number of indicators will be used, like interest rate differentials between a country's sovereign bonds and the amount charged for Germany Bundesbank bonds, the cost of sovereign debt CDS, the liquidity situation and market volatility. Above all, the ECB will not be a senior bond-holder, meaning that it would not be top of the pile when it comes to repayment in the event of a borrowing country going bankrupt. This will reassure private investors, and the stock markets on Thursday afternoon rallied on the news. The ECB will retain its senior bond-holder status; however, under the previous sovereign debt buy-up programme (SMP), which has bought up €220 billion-worth of bonds since 2010.
Will the OMT achieve its aims? The former vice-president for Europe of bank Goldman Sachs pointed out that there are significant differences between the new measures and the previous SMP buy-up, like the structural adjustment conditions and timetable that must be respected, ownership of the aid by institutional lenders, greater transparency about the deals, the maturity of the bonds bought and the loss of senior bond-holder status for the ECB.
The ECB has revised down its economic forecasts for the eurozone. In 2012, it expects the eurozone to enter recession with GDP falling by between 0.2% and 0.6%, followed by lack-lustre growth next year (of between 0.4% and 1.4%). Inflation is expected to be between 2.4% and 2.6% in 2012 and between 1.3% and 2.5% in 2013. (MB/transl.fl)