The ECB yesterday unleashed another acronym, to add to the stew. This time (it’s different?) we have
Outright Monetary Transactions.
What this means in detail is dissected in the newspapers and blogs. See in particular Constantin Gurdgiv, the Irish times, and the guardian for good and differing takes.
In practice the ECB will purchase lots of govt debt in the secondary markets, subject to the countries whose bonds are being purchased in effect being under ECB and Commission scrutiny. These bond purchases will be sterilised: there will be no net addition to euro area liquidity.
That’s nice…but it’s not what’s needed.
First, who died (apparently modern capitalism…) and made ECB god? They’re a central bank, and it’s not at all clear that they should be overseeing fiscal actions. They should, like a good central bank, concentrate on monetary issues. Of course, absent reasonable or any actions from the governments, someone has to oversee the fisc, so perhaps we shouldn’t be so critical.
Second, it’s a time play. For states that can’t raises funds at reasonable rates the idea is that by the ECB intervening the rates will be driven down and the states can fund themselves. But that’s not the problem. Many states find themselves locked out because they have too much debt…cheaper det is not the solution, but LESS debt. In that regard for Ireland at least the next stage of the plan is to get the odious,in all senses, bank debt off the fiscal balance sheet. You cannot solve a solvency issue (yes, Greece, I’m looking at you) with liquidity operations (think , if you will, Anglo Irish Bsnk and 2008-9)
Third, the sterilisation will result in no new liquidity but will in effect shift existing liquidity towards more state funding and thus away from non state. It’s not clear that that is what’s needed now
Fourth, this is a beefed up version of the previous ECB acronym soup….each was unveiled as the solution, six months later they all had failed. Central banks and the currencies they supervise are in the end creatures of confidence. Serial overselling of a solution and serial failure does not inspire confidence. Combined with gross politicisation of monetary policy (if the Bundesbank wants to run Europe, they can’t…) confidence and indeed faith in the ECB and the euro is not high.