September 6th, 2012
04:01 PM GMT
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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.



soundoff (15 Responses)
  1. /lol

    bailing out banks, now bailing out countries, next the world, but who will bail us all out? E.T. 2012 LOL

    September 6, 2012 at 9:58 pm |
  2. Carl van Zijll de Jong

    “That we henceforth be no more children, tossed to and fro, and carried about with every wind of doctrine, by the sleight of man, and cunning craftiness, whereby they lie in wait to deceive.” All this “bond market” affair is nothing else but kicking the can down the street! It will only devalue human resources & energy until it becomes justified to terminate those who are unprofitable/unproductive, who are a burden for society. If we would adhere to the eternal laws of the universe we would have avoided the misery of many, and for everyone to earn their daily bread. For your information Google The World Monetary Order to Come.

    September 7, 2012 at 4:23 am |
  3. Evolution

    "That's it. It does not spur economic growth, create jobs, cut deficits, reform economies. "

    CNN stop reporting nonsense. It does do much more and you know it. With much less interest the governments will also have to cut much less on government spending to pay for that interest on debt. This means more money left for the economy. Also cutting and reforming is something that has been underway in Europe for some 2 years now and is greatly needed to live within your means.

    This nonsense that it destroys the economy is a secondary issue to financial destruction. EU combined debt is 83% of GDP. US debt already stands at 104% of GDP and unlike Europe the US isn`t doing anything to cut spending and build reform. All Washington has done since it started the crisis in 2007 is spend massively more then it gets in. Resulting in 1 trillion extra debt every 9 months. Now surpassing 16 Trillion Dollars in US Debt just this week. Where are all your articles and stories on this extreme debt level? Oh wait, you don`t want to make the US look bad as a US promotion Channel. `balanced international news network` My A..!

    September 7, 2012 at 6:05 am |
  4. cacalips

    Google ICeland bankers in prison.

    September 7, 2012 at 10:05 am |
  5. Johannesd

    Maybe CNN should turn it's attention to the US. After QE1, QE2, and talk about QE3, the US is still spending like a drunken sailor and stuck in a political stallmate with no end in sight. Offcourse it sells better to continue bashing the EU.

    September 7, 2012 at 11:43 am |
  6. Robert Powell PhD

    What a complete FRAUD and FARCE Merkel, Hollande, the EU, ECB and Dragi are: The EU and all its criminal politicians who created this entire financial mess have gone "Scott-free" without any one of them being held accountable or found guilty of fraud, theft and incredible misdeeds!
    Nothing will change in the EU with its corrupt politicians and Bankers and they will continue stealing EU citizen’s money, making the People the only ones responsible. Why has the EU Commission never asked Greek Politicians about the 200 billion Euros they have looted from the people and EU funds they stole and sent offshore and to Swiss banks?
    Because the Bankers & EU Commission is in on this game and absolutely corrupt… It is Pathetic... Time to tear the system down and start over... Stop voting for these horrible Criminal Politicians & jail the Bankers for financial fraud & get back citizens money!

    September 7, 2012 at 3:04 pm |
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  12. John Daniel

    the direction is shifting towards Asia, question is what are the stress level of the banks there?

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