OMT stands for Outright Monetary Transactions, and has been discussed much recently relation to the Eurozone crisis. OMT was thought up by Mario Draghi, President of the ECB, and is an unlimited but conditional bond buying program. Aimed at countries like Spain and Italy, the program requires countries to agree to certain austerity measures, at which point the ECB will purchase those countries’ debt.
Q. So, here we have it, just when we thought we were finished with the Eurozone acronyms.
A. Yes: ESM, FROB, ESFS, EML, LTRO, PIIGS: you could probably make up some new version of Scrabble just out of these acronyms. This one stands for “outright monetary transactions”, and was the brainchild of Draghi, the new head of the ECB. Has he announced it, it’s a unlimited but conditional bond buying program.The markets seem to like the idea, but the various EZ governments seem a little uncomfortable with how far Draghi has gone here.
Q. So, how does this program work?
A. OMT is aimed at Italy and, especially Spain The idea is that once government agrees to some austerity measures, the ECB, the EZ will buy that country’s debt instruments to bring down their yields. And the thinking is that this week’s new Spanish budget and deficit reduction announcements are an adequate basis for the program to commence.
Q. But so far, its still all talk, right? The Spanish haven’t actually passed any new laws or cut their deficits. Or even formally asked for the program to kick in.
A. Right. Yet the Euro’s up past 1.29 and those markets were rallying. But you’re raising the right point, which is: even if the government announces budget changes, there’s a big difference between that and passing laws while there are austerity riots in the streets.
Q. So, is there an enforcement mechanism for the OMT program?
A. Right. So the expectation is that the ECB and the IMF will have some so-called enforcement mechanisms in place, with quarterly reports due concerning concrete steps, like the actual passage of laws by the Spanish parliament. But as Monti said to Eric Shatzner yesterday right here, the sovereigns aren’t in love with the idea of the IMF having a role in all this. But in any case, what are they really going to do about it?
Q. But meantime, the markets have rallied and the bond yields are way down.
A. Yes. Now, in Italy, you can sort of see that. Fact is, Monti has done a pretty good job getting reforms passed in Italy, and their deficit picture is improving. Ireland has sort of gotten its act together. Spain is still a big question, but the markets seem to think that, one way or the other, things will improve.
Anyway, with all the improvement we’ve seen in the market, maybe talk is enough! A few more acronyms and the crisis will be fully solved.