Friday, September 7, 2012

The new ECB weapon (called OMT) at a glance

What is OMT (Outright Monetary Transactions) program about ?
It is a program of intervention of ECB on the secondary sovereign bond markets of Eurozone countries. Mario Draghi, the ECB President, clearly detailed yesterday the framework of this program:
1) Conditionality : a necessary (but not sufficent) condition for an OMT program in favour of a Eurozone state member is the existence of an EFSF/ESM bailout program for that country. The involvment of IMF shall be sought. If conditions attached to EFSF/ESM program for a country are not respected, OMT program will automatically terminate.
2) Coverage : OMT will only apply for future EFSF/ESM programs, or for member states currently under EFSF/ESM program when they will be regaining bond market access. Transactions will focus on the shorter part of the yield curve, i.e. 1 to 3 years. There is no ex-ante quantitative limit to OMT.
3) Creditors treatment : pari-passu treatment of ECB with other creditors of bonds subject to OMT.
4) Sterilization : liquidity created through OMT will be fully sterilized.
5) Transparency : there will be weekly and (more detailed) monthly publications of OMT that took place.
6) Termination of the Securities Market Program (SMP) : the securities held in SMP portfolio will be held to maturity.

What to think about this ?
First, the ECB delivered what was anticipated but without the support of the German Bundesbank. This is a poking for the Germans and could be costly in the future in term of cohesion of Eurozone.
Secondly, this is certainly a step in the right direction in order to calm markets fear about a possible breakup of Eurozone. ECB has deep pokets, and will use them in order to reduce the interest rates spreads amoung state members, which is a necessity in order to solve the crisis.
Thirdly, this move by ECB will only happen in favour of countries that will accept to drive their economies deeper into depression through the "strict and effective" conditions attached to any EFSF/ESM bailout plan. This is clearly the problem : a rescue plan that has at its core more demand-destroying measures will possibly do more harm than good.
Qui vivra verra...
Have a nice day !