OUTRIGHT MONETARY TRANSACTION.
SOURCE..
[during the peak of euro zone crisis,,we saw many efforts made by strong
economies to get the stuck economies of PIGS out of the mess....this was one
such attempt...conducted by ECB...
there were times when yields on 10 years bond were touching 7 % ,,which
is in a way considered punitive charges by lenders...there were serious
doubts about capabilities of nations to repay back the debts...
we witnessed trouble withing euro zone nations too...Germans were many a
times reluctant to help and fund for the discipline lack in conduct of
financial matters in south European nations...which was main center of euro
crisis...
German have carved their economy into a strong exporting
powerhouse,,thus attaining them exports surplus..they have strongest economy in
europe...
OMT was effort by ECB to buy the bonds so as to ensure that rates on
them do fall,,,,,and normalcy is restored...]
BBC NEWS,,,ECB OFFICIAL WEBSITE FOR PRESS RELEASE.]
Outright Monetary
Transactions (OMTs)
INTRODUCTION,,AND
DEFINITION
The term used for the European
Central Bank's programme of buying government bonds with maturities of between
one and three years with the aim of reducing a specific country's borrowing
costs. OMTs were only triggered if a country had applied to the European
Financial Stability Facility or European Stability Mechanism for financial
assistance and were conditional on a government putting in place financial
reforms approved by eurozone financial authorities and monitored by the
International Monetary Fund.
EUROPEAN CENTRAL BANK APPROVED IT..
Mario Draghi, president of the European Central
Bank, had unveiled details of a new bond-buying plan aimed at easing the
eurozone's debt crisis in 2012,September. The ECB aimed to cut the
borrowing costs of debt-burdened eurozone members by buying their bonds. ECB's actions came in response to eurozone economic
contraction in 2012, with continued weakness which was likely to continue into
2013. It was insisted that
the ECB was "strictly within our mandate" of maintaining financial
stability, but reiterated the need for governments to continue with their
deficit reduction plans and labour market reforms.
OMTs were only to be carried out in conjunction with European
Financial Stability Facility or European Stability Mechanism programmes.
In other words, countries had to request a bailout before the
OMTs are triggered.
The maturities of the bonds being purchased was to be between
one and three years and there was to be no limits on the size of bond purchases.
IMMEDIATE REACTION IN THE BOND MARKETS AND SHARE MARKETS
The Spanish government raised 3.5bn euros on the debt markets,
selling bonds due to mature in 2014, 2015 and 2016.
The implied cost of borrowing over two years fell from 4.71% to
2.80%; the three-year rate went from 5.09% to 3.68%; and the four-year
borrowing cost fell from 5.97% to 4.60%.
On the secondary market, where government bonds already in
circulation are traded by banks and other financial institutions, the yield on
10-year bonds fell below 6%. In recent months[during 2012 september], yields
had topped 7%, the level at which Ireland, Portugal and Greece had been forced
to seek international bailouts.
The yield on Italian 10-year bonds also fell.
Investors in European companies also appeared upbeat about the
plan. European stock markets closed up.
The FTSE 100 ended 2.1% higher; the German Dax, 2.9%; the French
Cac 40 index, 3.1%; and the Spanish IBEX, 4.9% at the close.
Bank shares in particular rose sharply, as they stand to lose
billions of euros should any eurozone government default on its debts as a
consequence of the crisis.
French banks Credit Agricole and Societe Generale both closed up
8%, while in Germany, Deutsche Bank rose 7% and Commerzbank, 5%. In London,
Lloyds banking group rose 7%.
POLITICAL RISK AND GLOBAL
THREATS...
Jens Weidmann, president of Germany's Bundesbank, remained
vigorously opposed to the ECB's plan, concerned that member states could become
hooked on central bank aid and fail to reform their economies sufficiently.
But the majority of the 23 ECB council members support the plan.
And the Organization for Economic Co-operation and Development
(OECD) added its support for the ECB bond-buying plan on Thursday, as it warned
that the eurozone crisis posed the greatest risk to the global economy.
PRESS RELEASE[FROM ECB]
6 September 2012 -
Technical features of Outright Monetary Transactions
As announced on 2 August 2012, the Governing Council of the European
Central Bank (ECB) has today taken decisions on a number of technical features
regarding the Eurosystem’s outright transactions in secondary sovereign bond markets
that aim at safeguarding an appropriate monetary policy transmission and the
singleness of the monetary policy. These will be known as Outright Monetary
Transactions (OMTs) and will be conducted within the following framework:
Conditionality
A necessary condition for Outright Monetary Transactions 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 involvement of the IMF shall also be sought for the design of
the country-specific conditionality and the monitoring of such a programme.
The Governing Council will consider Outright Monetary Transactions to
the extent that they are warranted from a monetary policy perspective as long
as programme conditionality is fully respected, and terminate them once their
objectives are achieved or when there is non-compliance with the macroeconomic
adjustment or precautionary programme.
Following a thorough assessment, the Governing Council will decide on
the start, continuation and suspension of Outright Monetary Transactions in
full discretion and acting in accordance with its monetary policy mandate.
Coverage
Outright Monetary Transactions will be considered for future cases of
EFSF/ESM macroeconomic adjustment programmes or precautionary programmes as
specified above. They may also be considered for Member States currently under
a macroeconomic adjustment programme when they will be regaining bond market
access.
Transactions will be focused on the shorter part of the yield curve, and
in particular on sovereign bonds with a maturity of between one and three
years.
No ex ante quantitative limits are set on the size of Outright Monetary
Transactions.
Creditor treatment
The Eurosystem intends to clarify in the legal act concerning Outright
Monetary Transactions that it accepts the same (pari passu) treatment as
private or other creditors with respect to bonds issued by euro area countries
and purchased by the Eurosystem through Outright Monetary Transactions, in
accordance with the terms of such bonds.
Sterilisation
The liquidity created through Outright Monetary Transactions will be
fully sterilised.
Transparency
Aggregate Outright Monetary Transaction holdings and their market values
will be published on a weekly basis. Publication of the average duration of
Outright Monetary Transaction holdings and the breakdown by country will take
place on a monthly basis.
Securities Markets
Programme
Following today’s decision on Outright Monetary Transactions, the
Securities Markets Programme (SMP) is herewith terminated. The liquidity
injected through the SMP will continue to be absorbed as in the past, and the
existing securities in the SMP portfolio will be held to maturity.
FEW ONLINE VIEWS
‘’New proposal is different from the ECB's previous bond-buying
programme in important ways.
The bank accumulated more than 200bn euros in bonds issued by
Greece, Ireland, Portugal, Italy and Spain under its Securities Market
Programme, but those purchases were always described as limited, and they were
never accompanied by any formal conditions.
The OMT, on the other hand, is described by Mr Draghi as
potentially unlimited in size.
Countries will first have to apply for assistance to eurozone
bail-out funds, and they will have to agree to 'strict and effective'
monitoring of efforts to reform their economies.
Ideally, the ECB would like the International Monetary Fund to
be involved in that process too, and the Fund says it is ready to co-operate.
It all begins to sound like 'bail-out lite' - and it puts the
ball firmly in the court of political leaders like Mariano Rajoy in Spain and -
a little further down the line - Mario Monti in Italy.
They will have to decide whether they want more intrusive
external surveillance of their economies - something they have been keen to
avoid.’’
ASSIGNMENT ON OUTRIGHT MONETARY
TRANSACTIION [OMT]
FOR
ECO. OF BANKING
BY
HARSH VARDHAN PATHAK SSEI-09
MSC INTEGRATED ECONOMICS
5TH
SEMESTER
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