The Eurosystem’s Outright Monetary Transactions – the ECB’s intervention in management of sovereign debt

Mario Draghi, a president of the European Central Bank introduced the technical features of the Eurosystem’s Outright Monetary Transactions in secondary sovereign bond markets during the press conference on the 6^th of September. The ECB’s approved conditions of programmes allow intervening in the financial markets and absorbing high yield sovereign debt securities.  The special programmes could relief borrowing cost of issued sovereign bonds through the ECB’s purchase of securities those are not accepted by investors. Considerations regarding the monetary and fiscal policies interactions intensified during the period of financial instability. However, interventions of central banks in the management of the sovereign debt are still assessed contrary.

According to the “Interactions Between Sovereign Debt Management and Monetary Policy Under Fiscal Dominance and Financial Instability” (No. 3 of OECD Working Papers on Sovereign Borrowing and Public Debt Management), published by Blommestein, H. J. and P. Turner (2012), it is difficult to separate monetary and public debt management as both policies are involved in the sales of sovereign debt to private sector, though in different forms. New issuance of sovereign debt securities or regulation of the supply and demand of sovereign debt affects investment decisions of firms and households, and impacts on macroeconomic development. Moreover, monetary and fiscal policy interactions, mandates, accountability and potential conflicts of policies were reviewed in the ECB’s article “Monetary and Fiscal Policy Interactions in a Monetary Union” published in July’s Monthly Bulletin, 2012. So, the ECB’s decision on the Eurosystem’s Outright Monetary Transactions could not be judged as urgent and reckless.

A necessary condition for Outright Monetary Transactions approved by the Governing Council of the ECB 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 transactions will be focused on the sovereign bonds with a maturity of between one and three years with no ex ante quantitative limits in the size of the OMTs. The same pari passu treatment will be accepted for private and other creditors regarding the issued bonds by euro area countries and purchased through the OMTs. Moreover, the liquidity created through the OMTs will be fully sterilised and information about the OMTs holdings will be publicly available. It is also expected that the IMF will be involved into the design of the country-specific conditionality as well as the monitoring of such programmes. 

If we assume that according to the borrowing demand and high costs of Italy and Spain, those two countries will enter the OMTs programmes, what are the high quality securities the ECB is going to sell in order to offset increased liquidity?