Outright Monetary Transactions

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Outright Monetary Transactions ("OMT") is a program of the European Central Bank under which the bank makes purchases ("outright transactions") in secondary, sovereign bond markets, under certain conditions, of bonds issued by Eurozone member-states.

Launch[edit]

On 2 August 2012, the Governing Council of the European Central Bank (ECB) announced that it would undertake outright transactions in secondary, sovereign bond markets, aimed "at safeguarding an appropriate monetary policy transmission and the singleness of the monetary policy." The technical framework of these operations was formulated on 6 September 2012.[1] On the same date, the bank's Securities Markets Programme (SMP) was terminated.[1]

Description[edit]

OMT is considered by the European Central Bank once a Eurozone government asks for financial assistance. The Eurozone has established the European Stability Mechanism and the European Financial Stability Facility bailout funds in order to meet the challenges of the European debt crisis. From these funds and through OMT, the Eurozone's central bank can, henceforth, buy government-issued bonds that mature in 1 to 3 years, provided the bond-issuing countries agree to certain domestic economic measures – the latter being the so-called term of "conditionality".

The aim is to bring bond yields, at the long end of the curve (i.e. 10 years), down to levels that lower borrowing costs for countries that face problems selling debt, and, thus, provide investors with confidence in the euro for them to buy up bonds in a normal market.[2]

Outright Monetary Transactions are not the same as quantitative easing (QE) operations, since, in the latter, the central banks buy bonds and, by doing so, inject liquidity into the banking system, with the aim of stimulating economic activity. The ECB has made clear[1] that the principle of "full sterilisation"[3] will apply, whereby the bank will be reabsorbing the money pumped into the system "by any means necessary." In practice, the only means of sterilisation used has been the auctioning of sufficient quantities of one-week deposits at the ECB - the same means of sterilisation that the ECB used for its previous bond-buying programme, the SMP.

Duration of assistance[edit]

European Central Bank president Mario Draghi has stated that the bank's Governing Council, is empowered to decide on the start, continuation and suspension of Outright Monetary Transactions, "in full discretion and acting in accordance with its monetary policy mandate."[4]

OMT operations end once "their objectives are achieved" or when there is non-compliance with the macroeconomic adjustment or precautionary programme.[4]

Controversy and debate[edit]

The decision of the European Central Bank to enact OMT operations was not adopted unanimously, with the German representative voting against it.[2] Germany's Central Bank president Jens Weidmann, along with German economy minister Philipp Roesler had expressed their opposition to ECB's bond-buying plan, arguing that it might erode "the willingness of Eurozone member-states to implement reforms."

Post-Keynesian economists expressed their doubts about OMT's effectiveness in dealing with the European debt crisis, some arguing that the program will "fail", because "it doesn’t address the core problem – that southern Europe is in depression and the only way out [of it] is for budget deficits to expand."[5]

Following the announcement of the ECB in the second half of 2012 government bond spreads within the Eurozone went down considerably. According to economics professor Paul De Grauwe, economist Yuemei Ji and researchers at the Barcelona Graduate School of Economics, this decline can be mainly attributed to OMT, making the sheer announcement of the program effective in its own right.[6] [7] At the same time, as Paul Krugman notes, ”the ECB’s efforts rely to an important extent on a bluff, in the sense that nobody knows what would happen if OMT were actually required”.[8]

See also[edit]

References[edit]

  1. ^ a b c "Technical features of Outright Monetary Transactions", ECB Press Release, 6 September 2012
  2. ^ a b "OMG! OMTs have arrived to save the Euro", by Jim Boulden, CNN, 6 September 2012
  3. ^ 6 September 2012 - Technical features of Outright Monetary Transactions "The liquidity created through Outright Monetary Transactions will be fully sterilised."
  4. ^ a b "Draghi’s Statement on ECB Outright Monetary Transactions", Bloomberg, 6 September 2012
  5. ^ "The ECB plan will fail because it fails to address the problem", by Bill Mitchell, 11 September 2012
  6. ^ [1], De Grauwe, P, & Ji, Y. (2013). "Panic-driven austerity in the Eurozone and its implications" Vox EU, Paper on voxeu.org, 21 February 2013.
  7. ^ [2], Castells, M., Georgakopoulos, A., Giménez Trill, E., Lastunen J. & Lymperakis-Pitas, K. (2014). "An Evaluation of the ECB’s Outright Monetary Transactions" Barcelona GSE, Paper on thevoice.barcelonagse.eu, 10 July 2014.
  8. ^ "Even More On Scotland", by Paul Krugman, 10 September 2014