The European Central Bank (ECB) followed the Fed's September 13 announcement with its own the next day. Last Friday, the ECB announced the OMT (Outright Monetary Transactions). OMT is the successor to the ECB's SMP and LTRO programs, which also aimed to bring down interest rates on sovereigns under attack. (The SMP is the Securities Market Program, introduced in May 2010 and, as of September 6, subsumed into OMT. LTRO is the Long-Term Refinancing Operation the ECB introduced last December.)
OMT, like the SMP and LTRO, breaks new ground, giving the ECB ever more importance as the institution that can act immediately to save the Euro. What's makes the OMT different from its predecessors?
First, the only monetary limit on the ECB's purchases of countries' secondary market debt is the amount outstanding that matures within three years. There's no upper limit on the ECB's purchases otherwise. The ECB will buy debt with maturities of up to three years, including longer-term debt with three years (or less) of life remaining.
Second, the ECB will not have preferred creditor status. The debt it purchases will receive pari-passu treatment with private creditors. That's an earthshaking change: if there are losses, the ECB will share them along with other creditors, a first.
Third, the ECB will buy countries' debt in the secondary markets only on the condition that the country has a "precautionary program" or a "macro-economic adjustment program" in place. Either program must be negotiated with the ESM/ESFS, which will look to the IMF (International Monetary Fund, up till now the world's creator and enforcer of macro-economic adjustment programs) for guidance. (Yes, more letters... The ESM is the European Stabilization Mechanism. The ESM was to replace the ESFS (European Financial Stability Facility) on July 1. However, until the German courts ruled on the constitutional challenge to Germany's participation in the ESM, the ESM could not be born. On September 12, the German court ruled that Germany's contribution to the ESM is constitutional -- up to the €190 billion agreed. (That is 37% of the ESM's funding.) The German Parliament must approve any future contributions.)
Fourth, governments must request assistance and the ECB can stop the program (in theory, at least). Spain has been reluctant to ask for assistance even though it was announced in June that Spain would request and receive up to €100 billion in assistance to deal with its banking sector rescue.
Fifth, the OMT was not launched with the unanimous consent of the ECB's members. The Bundesbank dissented, but the program was adopted anyhow. It would seem that Mrs. Merkel and the Bundesbank don't march in lockstep.
The ECB and Fed took dramatic steps last Thursday and Friday. Crisis has fostered central banks' creativity: to contain crises, central banks are inventing new monetary policy instruments. Time will tell how well they work, in the short and the long-term.
OMT, like the SMP and LTRO, breaks new ground, giving the ECB ever more importance as the institution that can act immediately to save the Euro. What's makes the OMT different from its predecessors?
First, the only monetary limit on the ECB's purchases of countries' secondary market debt is the amount outstanding that matures within three years. There's no upper limit on the ECB's purchases otherwise. The ECB will buy debt with maturities of up to three years, including longer-term debt with three years (or less) of life remaining.
Second, the ECB will not have preferred creditor status. The debt it purchases will receive pari-passu treatment with private creditors. That's an earthshaking change: if there are losses, the ECB will share them along with other creditors, a first.
Third, the ECB will buy countries' debt in the secondary markets only on the condition that the country has a "precautionary program" or a "macro-economic adjustment program" in place. Either program must be negotiated with the ESM/ESFS, which will look to the IMF (International Monetary Fund, up till now the world's creator and enforcer of macro-economic adjustment programs) for guidance. (Yes, more letters... The ESM is the European Stabilization Mechanism. The ESM was to replace the ESFS (European Financial Stability Facility) on July 1. However, until the German courts ruled on the constitutional challenge to Germany's participation in the ESM, the ESM could not be born. On September 12, the German court ruled that Germany's contribution to the ESM is constitutional -- up to the €190 billion agreed. (That is 37% of the ESM's funding.) The German Parliament must approve any future contributions.)
Fourth, governments must request assistance and the ECB can stop the program (in theory, at least). Spain has been reluctant to ask for assistance even though it was announced in June that Spain would request and receive up to €100 billion in assistance to deal with its banking sector rescue.
Fifth, the OMT was not launched with the unanimous consent of the ECB's members. The Bundesbank dissented, but the program was adopted anyhow. It would seem that Mrs. Merkel and the Bundesbank don't march in lockstep.
The ECB and Fed took dramatic steps last Thursday and Friday. Crisis has fostered central banks' creativity: to contain crises, central banks are inventing new monetary policy instruments. Time will tell how well they work, in the short and the long-term.
No hay comentarios:
Publicar un comentario