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 The euro area, commonly called the eurozone (EZ), is a Monetary union, currency union of 20 Member state of the European Union, member states of the European Union (EU) that have adopted the euro (Euro sign, €) as their primary currency ...

member-states. The program was presented by its supporters as a principal manifestation of

Mario Draghi Mario Draghi (; born 3 September 1947) is an Italian politician, economist, academic, banker, statesman, and civil servant, who served as the prime minister of Italy from 13 February 2021 to 22 October 2022. Prior to his appointment as prime mi ...

's (July 2012) commitment to do "whatever it takes" to preserve the euro. OMT is considered by the European Central Bank once a

government asks for financial assistance. The Eurozone has established the

European Stability Mechanism The European Stability Mechanism (ESM) is an intergovernmental organization located in Luxembourg City, which operates under public international law for all eurozone member states having ratified a special ESM intergovernmental treaty. It was ...

and the European Financial Stability Facility

bailout A bailout is the provision of financial help to a corporation or country which otherwise would be on the brink of bankruptcy. A bailout differs from the term ''bail-in'' (coined in 2010) under which the bondholders or depositors of global syst ...

funds in order to meet the challenges of the

European debt crisis The euro area crisis, often also referred to as the eurozone crisis, European debt crisis, or European sovereign debt crisis, was a multi-year debt crisis and financial crisis in the European Union (EU) from 2009 until, in Greece, 2018. The e ...

. 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 of the program is then to prevent divergence in short-term bond yields, and to ensure that the ECB's monetary policy is transmitted equally to all the Eurozone's member economies. The central bank notes that the OMT is meant as a means to "safeguard an appropriate monetary policy transmission and the singleness of the monetary policy". Interventions through the program are stipulated to be potentially limitless. Outright Monetary Transactions are not the same as

quantitative easing Quantitative easing (QE) is a monetary policy action where a central bank purchases predetermined amounts of government bonds or other financial assets in order to stimulate economic activity. Quantitative easing is a novel form of monetary polic ...

(QE) operations, since, in the latter, the central banks buy bonds and, by doing so, inject

liquidity Liquidity is a concept in economics involving the convertibility of assets and obligations. It can include: * Market liquidity In business, economics or investment, market liquidity is a market's feature whereby an individual or firm can quic ...

into the banking system, with the aim of stimulating economic activity. The ECB has made clear that the principle of "full sterilisation" 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.

Launch

On 2 August 2012, the Governing Council of the

European Central Bank The European Central Bank (ECB) is the central component of the Eurosystem and the European System of Central Banks (ESCB) as well as one of seven institutions of the European Union. It is one of the world's Big Four (banking)#International ...

(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. The program was adopted with near unanimity, the President of the Bundesbank being the sole vote against. On the same date, the bank's Securities Markets Programme (SMP) was terminated."Technical features of Outright Monetary Transactions"
ECB Press Release, 6 September 2012

Use, conditions, and duration of assistance

European Central Bank president

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". For the OMT to be activated towards a certain eurozone state, a total of four conditions need to be fully met: # The state needs to have received financial sovereign support from the eurozone's bailout funds EFSF/ESM, either in the form of direct macroeconomic support or precautionary conditioned credit lines. Receiving a bank recapitalization support package, like Spain did, does not qualify. # The signed conditioned Memorandum of Understanding attached to the EFSF/ESM sovereign support programme, shall be complied with at the time of OMT purchases. If under review, no OMT purchases will happen until the review has been concluded with the finding of programme compliance. # OMT purchases can at the earliest start, upon the time when the state has managed to regain complete access to private lending markets. According to ECB's definition, a sovereign state will have managed to regain complete access to private lending markets, only when it has succeeded to issue a new government bond series with a 10-year maturity. # OMT purchases of the government bonds with 1–3 year maturity, will finally only happen, if ECB after all 3 above pre-conditions have been found to be met, at the same time find that the market traded interest rate values for the government bonds are distressed, at some higher values compared to what can be justified by the fundamental economic data for the concerned state. OMT operations end once "their objectives are achieved" or when there is non-compliance with the macroeconomic adjustment or precautionary programme."Draghi’s Statement on ECB Outright Monetary Transactions"
''

Bloomberg Bloomberg may refer to: People * Daniel J. Bloomberg (1905–1984), audio engineer * Georgina Bloomberg (born 1983), professional equestrian * Michael Bloomberg (born 1942), American businessman and founder of Bloomberg L.P.; politician a ...

'', 6 September 2012. During the first year, after the new OMT instrument had been born, it was never used. Yet, it was evaluated to have delivered a significant positive impact to solve the problem with a broken monetary transaction mechanism, resulting in some more fairly priced interest rate levels for states under sovereign financial support programmes from EFSF/ESM. Because, as a member of the Executive Board of the ECB, Benoît Cœuré, described it

OMTs are an insurance device against
redenomination In monetary economics, redenomination is the process of changing the face value of banknotes and coins in circulation. It may be done because inflation has made the currency unit so small that only large denominations of the currency are in cir ...
risk, in the sense of reducing the probability attached to worst-case scenarios. As for any insurance mechanism, OMTs face a trade-off between insurance and incentives, but their specific design was effective in aligning ex-ante incentives with ex-post efficiency.

At the end of 2014, the group of states eligible to receive OMT support were only

Portugal Portugal, officially the Portuguese Republic, is a country on the Iberian Peninsula in Southwestern Europe. Featuring Cabo da Roca, the westernmost point in continental Europe, Portugal borders Spain to its north and east, with which it share ...

and

Ireland Ireland (, ; ; Ulster Scots dialect, Ulster-Scots: ) is an island in the North Atlantic Ocean, in Northwestern Europe. Geopolitically, the island is divided between the Republic of Ireland (officially Names of the Irish state, named Irelan ...

. As none of them, however, had met the fourth condition for support (suffering from distressed interest rates upon the time of their regain of complete access to private lending markets), still no OMTs had been activated by ECB. The next states presumed to have been potential candidates to receive OMT were

Greece Greece, officially the Hellenic Republic, is a country in Southeast Europe. Located on the southern tip of the Balkan peninsula, it shares land borders with Albania to the northwest, North Macedonia and Bulgaria to the north, and Turkey to th ...

(expected to regain "complete access to lending markets" in 2015 but did not at that time) and

Cyprus Cyprus (), officially the Republic of Cyprus, is an island country in the eastern Mediterranean Sea. Situated in West Asia, its cultural identity and geopolitical orientation are overwhelmingly Southeast European. Cyprus is the List of isl ...

(also expected to regain complete access to lending markets in 2015 and also did not make it).

Program evaluation

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

Cass Business School Bayes Business School, formerly known as Cass Business School, is the business school of City St George's, University of London, located in St Luke's, just to the north of the City of London. It was established in 1966. Bayes Business School ...

, this decline can be mainly attributed to OMT, making the sheer announcement of the program effective in its own right.De Grauwe, P., & Y. Ji (2013)
"Panic-driven austerity in the Eurozone and its implications"
Vox EU, Paper on voxeu.org, 21 February 2013.Saka, O., Fuertes, A.M. & E. Kalotychou (2015)
"How did the ECB save the Eurozone without spending a single euro? "
Vox EU, Paper on voxeu.org, 26 March 2015. At the same time, as

Paul Krugman Paul Robin Krugman ( ; born February 28, 1953) is an American New Keynesian economics, New Keynesian economist who is the Distinguished Professor of Economics at the CUNY Graduate Center, Graduate Center of the City University of New York. He ...

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".Paul Krugman
"Even More On Scotland"
''The New York Times'', 10 September 2014.

Post-Keynesian Post-Keynesian economics is a school of economic thought with its origins in '' The General Theory'' of John Maynard Keynes, with subsequent development influenced to a large degree by Michał Kalecki, Joan Robinson, Nicholas Kaldor, Sidney ...

economists have expressed their doubts about OMT's effectiveness in dealing with the

, 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 f itis for

budget deficits The government budget balance, also referred to as the general government balance, public budget balance, or public fiscal balance, is the difference between government government revenues, revenues and government expenditures, spending. For ...

to expand." Bill Mitchell
"The ECB plan will fail because it fails to address the problem"
11 September 2012. An ECB working paperAltavilla, Giannone and Lenza (2014)

European Central Bank, Working Paper Series 1707. evaluated the efficacy of OMT policies. That paper found that such policies "decreased the Italian and Spanish two-year government bond yields by about two percentage points, while leaving unchanged the bond yields of the same maturity in Germany and France". Moreover, "the scenario analysis suggests that the reduction in bond yields due to OMT announcements is associated with a significant increase in real activity, credit, and prices in Italy and Spain with relatively muted spillovers in France and Germany."WSJ
"Economists Prove Success of ECB’s OMT"
''The Wall Street Journal'', 5 August 2014.

Controversy and legal challenge

The decision of the European Central Bank to enact OMT operations was not adopted unanimously, with the German representative voting against it. Jim Boulden
"OMG! OMTs have arrived to save the Euro"
, CNN, 6 September 2012. Germany's Central Bank president

Jens Weidmann Jens Weidmann (born 20 April 1968) is a German economist who served as president of the Deutsche Bundesbank between 2011 and 2021. He also served as chairman of the Board of the Bank for International Settlements (BIS). Before moving to the Bunde ...

, 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". The OMT decision has also been challenged in the German Federal Constitutional Court by members of the German

Bundestag The Bundestag (, "Federal Diet (assembly), Diet") is the lower house of the Germany, German Federalism in Germany, federal parliament. It is the only constitutional body of the federation directly elected by the German people. The Bundestag wa ...

, including German politician Peter Gauweiler, and by the German political party

Die Linke Die Linke (; ), also known as the Left Party ( ), is a democratic socialist political party in Germany. The party was founded in 2007 as the result of the merger of the Party of Democratic Socialism (PDS) and Labour and Social Justice – The ...

. The German Constitutional Court requested a preliminary ruling from the

European Court of Justice The European Court of Justice (ECJ), officially the Court of Justice (), is the supreme court of the European Union in matters of European Union law. As a part of the Court of Justice of the European Union, it is tasked with interpreting ...

(ECJ) concerning the compatibility of the OMT decision with the

Treaty on the Functioning of the European Union The Treaty on the Functioning of the European Union (TFEU) is one of two treaties forming the constitutional basis of the European Union (EU), the other being the Treaty on European Union (TEU). It was previously known as the Treaty Establish ...

(Case C-62/14). In its request for a preliminary ruling, the German Constitutional Court expressed doubts about the legality of OMT under German and

EU law European Union law is a system of Supranational union, supranational Law, laws operating within the 27 member states of the European Union (EU). It has grown over time since the 1952 founding of the European Coal and Steel Community, to promote ...

. In January 2015, an Advocate General Opinion stated that the programme is in principle compatible with Treaty on the Functioning of the European Union. ECJ made its final ruling of the case in June 2015, declaring the conditional "OMT program" to be legal, as it due to its attached conditions ''"does not exceed the powers of the ECB in relation to monetary policy and does not contravene the prohibition of monetary financing of EU nations"''.

References

External links