Do OMTs really exist?

“let me mention what has been, in our sense, the most powerful monetary policy instrument so far: the OMTs.” ECB president Mario Draghi at the monthly ECB press conference 4th April 2013

When the history of the European financial crisis 2007-onwards is eventually written, it may transpire that the solution turned out to be the promise of a fantasy which never became reality. Last year, the ECB president Mario Draghi announced a scheme termed “Outright Monetary Transactions” which were advertised as the ECB buying the sovereign bonds of countries. At its heart, the promise conflicts with the ECB’s primary objective of keeping inflation at, or near, 2% per annum, because if the ECB buys bonds it is printing new money and that leads to inflation. But the world, and more importantly, the markets swallowed the promise/threat and since then, bond yields have steadily fallen as the perceived risk of default has receded with the ECB regarded as a buyer of last resort.

This morning, one of the 17 central bank governors on the ECB’s governing council said “given that in the last few months we have had a kind of stabilisation, normalisation, maybe it [OMTs] will never be used” The governor of the Greek central bank, George Provopoulos was speaking in Athens today.

In Ireland, we would like some clarity on OMTs because in six months, our friends in the bailout Troika will write their last cheque and given we still have a €10bn annual deficit, we will need someone to lend to us. We have built up a buffer in the national exchequer and we will be able to finance ourselves to the end of 2014 using present projections, but at that point, we’ll be riding the bike without stabilizers and the concern is that the market won’t lend to us at sustainable interest rates. So we would like the backstop of OMTs.

Given we are exiting our bailout programme and that we have issued billions in long term bonds to a broad-based market in recent months, you would think we’re eligible for OMTs – those were the criteria stated by the ECB last year -but finance minister Michael Noonan keeps refusing to make that clear.

He was again asked this week if Ireland now qualifies for OMTs and again he says it is in the gift of the ECB. It’s an unsatisfactory situation and means we remain uncertain about our funding when the Troika packs up and leaves. And with one ECB member expressing doubt that they’ll ever be used, are OMTs just a fantasy accepted by an otherwise-hardnosed market?

The parliamentary question and answer are here.

Deputy Pearse Doherty: To ask the Minister for Finance further to the European Central Bank press conference on 4 April 2013 in which the President of the ECB, Mr Mario Draghi, referred to OMTs and their precise rules, his views that the rules surrounding the criteria for access to the Outright Monetary Transaction scheme are precise; and if so, if he will confirm if the State meets the criteria for accessing funding under the OMT scheme at this time.

Minister for Finance, Michael Noonan: As I informed the Deputy previously (Parliamentary Questions of 12th February 2013, (No. 211) and of 21st February 2013, (No’s 94 & 95)) the Governing Council of the ECB made a decision to establish the Outright Monetary Transaction (OMT) scheme on 2nd August 2012, and issued a press statement on 6th September 2012 which outlined its technical features.

According to this ECB Press Release, the purpose of OMT is: “Safeguarding an appropriate monetary policy transmission and the singleness of the monetary policy”

This press statement sets out that a necessary condition for OMT is strict and effective conditionality attached to an appropriate European Financial Stability Facility/European Stability Mechanism (EFSF/ESM) programme. Such programmes can take the form of a full EFSF/ESM macroeconomic adjustment programme or a precautionary programme (Enhanced Conditions Credit Line), provided that they include the possibility of EFSF/ESM primary market purchases. The ECB have also stated that OMT may also be considered for Member States currently under a macroeconomic adjustment programme “when they will be regaining bond market access”.

The ECB press statement also notes that the ECB’s Governing Council will decide on the start, continuation and suspension of OMT, following a thorough assessment, in full discretion and acting in accordance with its monetary policy mandate.  The decision on whether to grant OMT or otherwise in any particular case is therefore a matter for the ECB.

I believe the ECB’s announcement regarding its OMT programme is a significant development and is viewed as such by the financial markets.

I also note Mr Draghi’s comments that one of the reasons why the ECB’s OMT scheme is successful “was because governments made significant progress in undertaking both fiscal consolidation and, in some cases, structural reforms.”

We are now in the final year of our EU IMF programme and our focus is now firmly fixed on a successful and durable exit from the programme.  The recent highly successful sale of long term bonds by NTMA is another very significant step in this process.  We continue to assess a number of options in this regard. However, we must respect the fact that the decision on whether to grant OMT or otherwise in any particular case is a matter for the ECB, which is an independent body.