Blog Post

The SMP is dead. Long live the OMT

Following the various announcements of President Draghi in July and August, most analysts were expecting further clarification of the modalities of the sovereign debt purchase programme at today’s ECB meeting. They will not be disappointed.

By: Date: September 6, 2012 Topic: European Macroeconomics & Governance

Following the various announcements of President Draghi in July and August, most analysts were expecting further clarification of the modalities of the sovereign debt purchase programme at today’s ECB meeting. They will not be disappointed.

In his press conference President Draghi recognized that the old programme, known as the Securities Market Programme (SMP), had not worked, and announced that it will as being replaced as of today by a new programme called Outright Monetary Transactions (OMT). The new programme differs from the old one in four main respects:

·         Activation and continuation of OMT with respect to bonds issued by a euro area country is subject to “strict and effective” conditionality. No such requirement existed, at least formally, for the SMP.

·         No ex ante quantitative limits are set on the size of OMT. By contrast SMP interventions were de facto subject to limits.

·         The Eurosystem will be treated pari passu with other creditors for bonds purchased through OMT. This was not the case for the SMP and President Draghi announced that Eurosystem seniority for existing SMP holdings would remain in place.

·         There will be much greater transparency on OMT than SMP holdings, including the breakdown by country on a monthly basis.

The new programme reflects two fundamental departures from previous ECB attitudes made explicit by President Draghi during his press conference. One is the admission that some euro area countries are trapped in a bad equilibrium caused self-fulfilling expectations. This is essentially the argument for having the ECB act as a lender of last resort to governments that a number of economists have been putting forward. This admission is reflected in the absence of ex ante quantitative limits on the size of OMT. The other is the conviction that sovereign debt purchase by the ECB can only be effective if there is recognition by governments that the reason why their country finds itself in a bad equilibrium is due in the first place to their own earlier economic policies. This recognition translates into a strict and effective conditionality attached to an EFSF/ESM programme which, however, need not be a full macro-adjustment programme. A precautionary programme could be sufficient but a sectoral programme like the EFSF/ESM programme for Spanish banks is not.

The OMT is no doubt a great improvement over the SMP. The notion that solving the crisis requires a two-legged approach, as President Draghi insisted several times during his press conference, involving both the ECB and governments, and the creation of a mechanism of conditionality meant to ensure that each leg moves in the right direction is a great step forward. Indeed one of the tragedies of the euro area crisis so far has been the lack of an authority capable of providing the necessary coordination between the various actors, mainly the national governments and the independent central bank resulting in a game of chicken among governments and between governments and the central bank.

Whether or not the OMT succeeds in solving the euro area chicken game will soon been known. The only question for now is whether Spain and its euro area partners will go for a full macro-adjustment or a precautionary EFSF/ESM programme. The next question will be whether Italy can do without the ECB’s OMT and its conditionality. A happy outcome for Spain would certainly be good news for Italy as well.           


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.


Warning: Invalid argument supplied for foreach() in /home/bruegelo/public_html/wp-content/themes/bruegel/content.php on line 449
View comments
Read article More on this topic More by this author

Blog Post

The June Eurogroup meeting: Reflections on BICC

The Eurogroup met on June 13th to discuss the deepening of the economic and monetary union (EMU) and prepare the discussions for the Euro Summit. From the meeting came two main deliverables: an agreement over a budgetary instrument for competitiveness and convergence and the reform of the European Stability Mechanism (ESM) treaty texts. We review economists’ first impressions.

By: Inês Goncalves Raposo Topic: European Macroeconomics & Governance Date: June 24, 2019
Read about event More on this topic

Upcoming Event

Jun
25
08:30

How comprehensive is the EU political realignment?

Has the left-right divide become obsolete in EU politics?

Speakers: David Amiel, Otilia Dhand, Nicolas Véron and Silke Wettach Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read article More on this topic More by this author

Podcast

Podcast

Deep Focus: Making a success of EU cohesion policy

Bruegel senior fellow Zsolt Darvas talks to Sean Gibson in this Deep Focus podcast about how the EU can improve its cohesion policy, citing the best examples of its implementation and stressing the methodological difficulties in measuring its effectiveness.

By: The Sound of Economics Topic: European Macroeconomics & Governance Date: June 20, 2019
Read about event More on this topic

Past Event

Past Event

What reforms for Europe's Monetary Union: a view from Spain

How is a successful European Monetary Union still possible in today's ever-shifting political landscape? What reforms need to occur in order to guarantee success of cohesive policies?

Speakers: Fernando Fernández, José Carlos García de Quevedo, Gabriele Giudice, Inês Goncalves Raposo, Javier Méndez Llera and Isabel Riaño Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: June 19, 2019
Read article Download PDF More on this topic

External Publication

Soaring house prices in major cities: how to spot and moderate them

This article examines whether there are regional differences in house price growth within European countries and find a stronger cyclical pattern in capital cities compared to other regions, indicating a clear rationale for regional-level tools. The authors recommend using macro-prudential measures at a regional level, in particular loan-to-value and debt-to-income limits, to dampen the housing boom-bust cycle.

By: Grégory Claeys, Konstantinos Efstathiou and Dirk Schoenmaker Topic: European Macroeconomics & Governance Date: June 19, 2019
Read article More on this topic More by this author

Blog Post

GNI-per-head rankings: The sad stories of Greece and Italy

No other country lost as many positions as Greece and Italy in the rankings of European countries by Gross National Income per head, between 1990 and 2017. The tentative conclusion here is that more complex, country-specific stories – beyond the euro, or the specific euro-area fiscal rules – are needed to explain these individual performances.

By: Francesco Papadia Topic: European Macroeconomics & Governance Date: June 18, 2019
Read article More on this topic More by this author

Blog Post

Uncertainty over output gap and structural-balance estimates remains elevated

The EU fiscal framework strongly relies on the structural budget balance indicator, which aims to measure the ‘underlying’ position of the budget. But this indicator is not observed, only estimations can be made. This post shows that estimates of the European Commission, the IMF, the OECD and national governments widely differ from each other and all estimates are subject to very large annual revisions. The EU should get rid of the fiscal rules that rely on structural balance estimates and use this opportunity to fundamentally reform its fiscal framework.

By: Zsolt Darvas Topic: European Macroeconomics & Governance Date: June 17, 2019
Read article More on this topic More by this author

Blog Post

The campaign against ‘nonsense’ output gaps

A campaign against “nonsense” consensus output gaps has been launched on social media. It has triggered responses focusing on the implications of output gaps for fiscal policy under EU rules, especially for Italy. But the debate about the reliability of output-gap estimates is more wide-ranging.

By: Konstantinos Efstathiou Topic: European Macroeconomics & Governance Date: June 17, 2019
Read about event More on this topic

Past Event

Past Event

Role of national structural reforms in enhancing resilience in the Euro Area

At this event Gita Gopinath, Chief Economist at the IMF will discuss the role of national structural reforms in enhancing resilience in the Euro Area.

Speakers: Shekhar Aiyar, Maria Demertzis, Romain Duval, Gita Gopinath and Guntram B. Wolff Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: June 17, 2019
Read article Download PDF More on this topic

Policy Brief

A strategic agenda for the new EU leadership

Memo to the presidents of the European Commission, Council and Parliament. 'A strategic agenda for the new EU leadership' by Maria Demertzis, André Sapir and Guntram Wolff is the first of our 2019 Bruegel memos to the new presidents of the European Commission, Council and Parliament. Focusing on the most important economic questions at EU level, these Bruegel memos are intended to be a strategic to-do list, outlining the state of affairs that will greet the new Commission.

By: Maria Demertzis, André Sapir and Guntram B. Wolff Topic: European Macroeconomics & Governance Date: June 13, 2019
Read about event More on this topic

Past Event

Past Event

Past, present, and future EU trade policy: a conversation with Commissioner Malmström

What was trade policy during the last European Commission? What will be the future of European trade under the next Commission?

Speakers: Cecilia Malmström, André Sapir and Guntram B. Wolff Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: June 13, 2019
Read article More on this topic More by this author

Podcast

Podcast

Director’s Cut: A strategic agenda for the incoming EU presidents

In this Director’s Cut of ‘The Sound of Economics’, Bruegel’s Guntram Wolff and Maria Demertzis talk through their memo to the new presidents of the European Commission, Council and Parliament, outlining the specific measures that should be implemented in order to tackle the most formidable challenges arising in the next five years.

By: The Sound of Economics Topic: European Macroeconomics & Governance Date: June 12, 2019
Load more posts