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.

Read about event More on this topic
 

Past Event

Past Event

How to strike the right balance between the three pillars of the pension system?

In this event panelists will discuss the future of European pension schemes.

Speakers: Elsa Fornero, Svend E. Hougaard Jensen and Suvi-Anne Siimes Topic: European Macroeconomics & Governance Date: September 23, 2021
Read article More on this topic More by this author
 

Blog Post

Germany’s foreign economic policy: four essential steps

Germany and the EU need to develop a strong and proactive agenda to manage foreign economic relations, which are essential for German and European prosperity.

By: Guntram B. Wolff Topic: European Macroeconomics & Governance Date: September 23, 2021
Read article Download PDF More by this author
 

Policy Contribution

A new integrated-value assessment method for corporate investment

To contribute more to the green transition, companies should start to make investment decisions based on integrated-value assessment, weighing up the environmental and social impacts alongside the financial returns.

By: Dirk Schoenmaker Topic: Energy & Climate, European Macroeconomics & Governance Date: September 23, 2021
Read article More on this topic More by this author
 

Podcast

Podcast

Unboxing the State of the Union 2021

In this Sound of Economics Live episode, Bruegel experts look at the State of the Union address delivered by Ursula von der Leyen, President of the European Commission.

By: The Sound of Economics Topic: European Macroeconomics & Governance Date: September 15, 2021
Read about event More on this topic
 

Past Event

Past Event

The Sound of Economics Live: Unboxing the State of the Union 2021

In this Sound of Economics Live episode, we look at the State of the Union address delivered by Ursula von der Leyen, President of the European Commission.

Speakers: Grégory Claeys, Maria Demertzis, Alicia García-Herrero and Giuseppe Porcaro Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: September 15, 2021
Read article Download PDF More on this topic
 

Policy Contribution

A green fiscal pact: climate investment in times of budget consolidation

Increasing green public investment while consolidating deficits will be a central challenge of this decade. A green fiscal pact would address this tension, but difficult trade-offs remain.

By: Zsolt Darvas and Guntram B. Wolff Topic: European Macroeconomics & Governance Date: September 9, 2021
Read about event More on this topic
 

Past Event

Past Event

Conference on the Future of Europe: envisioning EU citizens engagement

Bruegel Annual Meetings, Day 3 - Panellists will discuss different options and what they may entail while revisiting the debates on the future of Europe at national and EU-level that have been conducted thus far.

Speakers: Caroline de Gruyter, Kalypso Nicolaïdis, Niclas Poitiers and György Szapáry Topic: European Macroeconomics & Governance Location: Palais des Academies, Rue Ducale 1 Date: September 3, 2021
Read about event More on this topic
 

Past Event

Past Event

The role of the EU's trade strategy for an inclusive and sustainable recovery

Bruegel Annual Meetings, Day 3 - We are delighted to welcome Valdis Dombrovskis, Executive Vice President of the European Commission for An Economy that Works for People to talk about Europe's trade strategy.

Speakers: Valdis Dombrovskis, Alicia García-Herrero and Guntram B. Wolff Topic: European Macroeconomics & Governance Location: Palais des Academies, Rue Ducale 1 Date: September 3, 2021
Read about event More on this topic
 

Past Event

Past Event

An in-depth look at the Italian Recovery and Resilience Plan

Bruegel Annual Meetings, Day 2 - A discussion of the largest national recovery plan.

Speakers: Carlo Altomonte, Declan Costello and Zsolt Darvas Topic: European Macroeconomics & Governance Location: Palais des Academies, Rue Ducale 1 Date: September 2, 2021
Read about event More on this topic
 

Past Event

Past Event

Blending physical and virtual: shaping the new workplace

Bruegel Annual Meetings, Day 2 - This panel will cover the changes the COVID-19 pandemic made to our workplaces, and what to expect in the near future.

Speakers: Nicholas Bloom, Michael Froman, Mario Mariniello, Sara Matthieu and Luca Visentini Topic: European Macroeconomics & Governance Location: Academy Palace Date: September 2, 2021
Read about event
 

Past Event

Past Event

European banks: under global competitive pressure?

Bruegel Annual Meetings, Day 2 - European banks have lost stature and remain generally low-profitability, low-valuation in comparison to their global peers. Is that a problem? If so, what can EU policymakers do to address it?

Speakers: José Antonio Álvarez Álvarez, Mairead McGuinness and Nicolas Véron Topic: European Macroeconomics & Governance, Finance & Financial Regulation Location: Palais des Academies, Rue Ducale 1 Date: September 2, 2021
Read about event More on this topic
 

Past Event

Past Event

Conversation on the recovery programmes

Bruegel Annual Meetings, Day 2- In this session, we discuss the recovery programmes.

Speakers: Maria Demertzis, Henry Foy and Tadeusz Kościński Topic: European Macroeconomics & Governance Location: Palais des Academies, Rue Ducale 1 Date: September 2, 2021
Load more posts