September 6th, 2012
04:01 PM GMT
London (CNN) - Get used to a new acronym in the euro alphabet soup.
OMT – Outright Monetary Transactions. That's what the European Central Bank is calling its upcoming plan to buy sovereign bonds on the secondary market (the ECB is allowed to buy bonds on the open market, after they have been sold to investors by the governments).
The details are truly central bank-speak: conditionality, sterilization, enhanced conditions. Forget all that for now.
Just remember the bottom line for the ECB: Draghi said the euro is "irreversible" and that is his story and he is sticking to it.
So what is an OMT?
Once a government asks for help from one of Europe's bailout funds (EFSF/ESM) and then promises to stick to the strings attached to that help (conditionality) then the ECB can if chooses, buy some bonds that mature in 1 to 3 years. The aim of the ECB, by opening its massive cheque book, is to bring bond yields, at the long end of the curve (10 years), down to levels that lowers borrowing costs for countries like Italy and Spain. The hope is investors will regain confidence in the euro and buy up bonds in a normal market.
That's it. It does not spur economic growth, create jobs, cut deficits, reform economies. Politicians still have to do that by cutting budget deficits, enacting austerity and structural reform, and remain in power. That is proving the hardest part of this entire sovereign debt crisis.
OMT differs greatly from QE (Quantitative Easing) where the central banks in London and Washington buy bonds, and by doing so, put more money into the banking system in hopes it will spur economic activity. The ECB does not like QE. More money sloshing around could lead to inflation (which means no price stability) so it will absorb that money back by any means necessary (Sterilization).
Interesting, the decision to enact the OMT was not unanimous – Draghi admitted it was a great majority (ie: The Germans voted against it) but its going ahead.
But D-Day has come – Draghi has done what he promised – do whatever the ECB can do within its mandate to try and bring about normality in the debt markets.
Then again, all the other bond buying programs have arguably not worked. So, 'son of OMT' might have to be born out of crisis – like all the other moves made in Europe over the past two years.
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