Thursday, September 6, 2012

ECB items from today's meeting..... Collateral requirements loosened , Outright Monetary Transaction Program technical features discussed....Various follow up pieces on Draghi's and the ECB's actions today , the German reaction and can Draghi's bazooka even work ? Suggested Answer : No. Half life of the relief rally will be ( a week or two - or until Rajoy denies he plans to seek a bailout....

Merkel meeting buys Rajoy more time to decide on bailout

“I am impressed by the measures being taken,” says chancellor

Spain's Prime Minister Mariano Rajoy, left, welcomes Germany's Chancellor Angela Merkel, right, during a meeting at the Moncloa Palace. / ANDRES KUDACKI (AP)
Spanish Prime Minister Mariano Rajoy on Thursday appeared to have bought some time to decide whether or not to seek a European bailout after meeting in Madrid with German Chancellor Angela Merkel, who voiced her strong support for the austerity measures he has introduced.
“I didn’t come here to say what reforms Spain should or should not take. I have plenty of confidence in the Spanish government and I am impressed by the measures it is taking,” Merkel said during a news conference after their meeting.
Merkel also told the press that she had not discussed conditions for a possible bailout, which saw the market rally and helped to push Spain’s borrowing costs down.
Rajoy has said that he wants to wait and see what conditions EU leaders, including the head of the European Central Bank (ECB), would impose on Spain if his government were to ask for a bailout. In Frankfurt, ECB president Mario Draghi announced that the bank would embark on a new bond-buying scheme but with “strict and effective” conditions for countries that ask for it (see story, right and page 6).
“There isn’t anything new. When there is news, I will tell you,” Rajoy said when pressed on whether or not he will ask the ECB to buy Spanish bonds. “I haven’t even had time to read Draghi’s speech yet.” The ECB president held his news conference at the same time that Merkel and Rajoy were talking to reporters in Madrid.
Just as Rajoy has been ambiguous over a possible rescue package, sources at the prime minister’s Moncloa office are also skirting the issue. But many believe that it is only a matter of time before Spain makes its formal request for aid.
Nevertheless, Rajoy wants to limit the number of conditions Brussels might demand of the Spanish government, and the prime minister had been expected to convey this message to the German chancellor and ask her to support him.
For the moment, Rajoy has bought some time, and will now wait to see how the markets react over the next few weeks to see if he can avoid having to ask for a handout.

( Draghi's bazooka only works once Rajoy requests Spain's bailout and accepts the conditions ... ) 

"Spain Requests Bailout On September 14" - Goldman's Definitive Post-Mortem On Europe's Third Bond Buying Attempt

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Yesterday, when Bloomberg leaked every single detail of today's ECB announcement, which thus means today's conference was not a surprise at all, yet the market sure would like to make itself believe it was, we noted that everything that was leaked, and today confirmed, came from a Goldman memorandum issued hours before. Simply said everything that happens at the ECB gets its marching orders somewhere within the tentacular empire headquartered at 200 West. Which is why when it comes to the definitive summary of what "happened" today, we go to the firm that pre-ordained today's events weeks ago. Goldman Sachs.Perhaps the most important part is this: "September 13-14: Spain to make formal request for EFSF support at the Eurogroup meeting. With a large (and uncovered) redemption looming at the end of October (and under pressure from other Euro area governments), we expect Spain to move towards seeking support." In other words, Rajoy has one more week before he is sacked and the Spanish festivities begin.
From Goldman's Dirk Schumacher
ECB meeting: Introducing the OMT

The announcements made at today’s ECB press conference were broadly in line with our expectations. An overwhelming majority of the Governing Council agreed to “address severe distortions in government bond markets, which originate from, in particular, unfounded fears on the part of investors of the reversibility of the Euro”. We view the ECB’s determination to provide a “fully effective backstop” as credible and, while we will only learn over time the practicalities of implementation (such as the range of yields the ECB deems consistent with an ‘irreversible Euro’ and thus will tolerate), today’s decision has nonetheless reduced tail risks in peripheral countries, at least in the shorter term. This should buy peripheral economies time to implement the consolidation and reforms needed to provide fundamentals consistent with continued Euro participation.
Details of the OMT
In order to qualify for the new Outright Monetary Transactions (OMT) program, countries will need to be participating in either a full or precautionary EFSF/ESM programme and accept the implied conditionality. IMF involvement will be sought in this context and the IMF has meanwhile released a press statement “strongly welcoming” the ECB’s decision, saying that it would cooperate with the ECB “within our framework”. Failure to fulfil the conditions established in the programme would lead the ECB to cease purchases. Existing programme countries can also qualify for the OMT “if they have regained bond market access”. What this means in practice (i.e., will it be necessary to issue a certain volume in order to prove that there is market access?) remains to be seen.
Purchases will concentrate on bonds with a maturity from one to three years, and will be fully sterilised. The ECB is already sterilising the purchases made under the SMP through weekly reverse tenders. These tenders drain the amount of money from the banking system that the ECB spent on buying peripheral bonds. The specifics of how OMT purchases will be sterilised have not been announced, but our base case is that they would take place in the same manner. The ECB will demonstrate greater transparency in publishing the magnitude, duration and country composition of the debt holdings accumulated under the OMT.

In the legal documentation establishing the OMT, the ECB will explicitly renounce any claim to seniority of its sovereign debt holdings under the programme. The Securities Markets Programme (SMP) will now be terminated, with the ECB retaining its senior creditor status for bonds purchased under the SMP.
Activating the OMT
With the ECB now having outlined its sovereign bond purchasing framework at least in skeletal form, the ball is now in the governments' court. Front and centre lies Spain.
Looking forward, we expect the following time-line in our base case:
  • September 12: German constitutional court gives its blessing to the ESM. Although we expect some procedural riders to be attached to the decision, this would allow German ratification to be completed and the ESM to be established in relatively short order.
  • September 13-14: Spain to make formal request for EFSF support at the Eurogroup meeting. With a large (and uncovered) redemption looming at the end of October (and under pressure from other Euro area governments), we expect Spain to move towards seeking support.
  • Second half of September: Conditionality required by EFSF will have to be accepted by the Spanish authorities, presumably requiring a parliamentary vote. In parallel, approval of other Euro area countries for the provision of EFSF support will need to be obtained: in some countries (notably Germany), this will also require parliamentary approval.
  • By end-September / early October: Memorandum of Understanding (MoU) codifying conditionality is signed, formalising the availability of EFSF support for Spain. At this point, the necessary conditions established by Mr. Draghi for ECB purchases of sovereign debt will have been met, well ahead of the large Spanish bond redemption.
  • At that point, the ECB would stand ready to purchase short-dated Spanish government securities should rates back up. Market conditions at that stage will dictate whether such interventions take place. Risks to this base case are largely political: a Spanish reluctance to seek EFSF support given the current lower level of yields; or German parliamentarians deeming the agreed conditionality too light. Even if these political risks materialise, we would still expect Spain to be forced to seek EFSF support in the course of October as market conditions deteriorate as a result of the delay.
    No rate cut - renewed deterioration needed for further easing
    Returning to the ECB’s announcements this afternoon, as far as standard policy measures are concerned, policy rates were left unchanged as the Governing Council saw no need to change its economic or inflation outlook on the back of the latest data. The ECB staff growth forecasts were revised down significantly, moving substantially closer to our own macroeconomic projections for 2012 and 2013. A renewed deterioration of the Euro area economy, however, could well shift the majority in the Governing Council towards a further easing. In any case, we think the Governing Council views it as more pressing to ensure that low policy rates are actually passed on to the real economy in those countries where this is needed most. Unclogging the monetary policy transmission mechanism, by means of its non-standard measures, therefore remains the main priority of the Governing Council.
    Changes to the collateral framework, but nothing more on non-standard measures for now
    The ECB also widened collateral eligibility to foreign currency denominated bonds and, for countries benefiting from EFSF/ESM support, suspended the minimum credit rating threshold on sovereign debt. There had been, according to President Draghi, no discussion of another LTRO. We saw the possibility that the Governing Council would reduce haircuts for some assets that are being posted by banks as collateral (and the elimination of the 'cliff' risk associated with sovereign downgrades in programme countries should have such an effect) but, at least for the time being, the focus is on the OMT. That said, remarks made by President Draghi during the Q&A part of the press conference suggest that the ECB may contemplate other non-standard measures if credit conditions in peripheral countries do not improve. Such measures could include the outright purchase of private bank debt and/or corporate debt.

( Even if Rajoy requests a bailout in the near term , will Draghi's bazooka save the day ? Suggested Answer : No. ) 

A Gentle Reminder Of The Effectiveness Of Prior ECB Bond Buying

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Today's announcement of the third-coming of the messiah-like Draghi's Bond-Buying program - even if under a different, more catchy, name - brings to mind a chart we offered by way of genuine concern the last time he mentioned this as an option. While he insists it's different this time (because they'll tell us the CUSIPs? we already knew when they were in; because its conditional? and revocable and who trusts their data; because its at the short-end?simply crushing up sovereign funding capabilities and leaving the roll/liquidity needs even greater; Unlimited? we don't remember a limit before?), it is clear that the immediate gaps tighter in bond yields (and spreads) on the announcement of the program was the best it ever was and bonds sold off through each of the previous two SMP efforts. Just saying...
Spanish and Italian bond yields (upper pane) versus the volume of ECB bond buying (lower pane).
...which in aggregate is around the same size that the market implied it was expecting - yields moved from ~4% to over 6.5% as the ECB soaked up over EUR250bn...


The Bundesbank Replies To The ECB

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Did the German Bundesbank roll over and die as Die Welt suggest, by yielding to the will of the ECB and Goldman? Or is it merely setting the stage for the inevitable German referendum? Many claim the Italian head of the ECB won today in his ever escalating confrontation with the last remaining German on the ECB governing council, although in reality he is merely doing what he has already done twice before. The outcome will be the same: abject failure to contain the crisis which will not be resolved until and if Europe succeeds in creating a united, Federal state, with one bond issuance authority. That will never happen: after all, 17 European states will never hand over their sovereignty to a third party, especially one which is backstopped by German cash. But it can pretend. In the meantime, Buba will not quietly go, instead it has already stated what it thinks, and what it thinks is that what the ECB is doing (once again) is "tantamount to financing governments by printing banknotes" and that monetary policy is now subjugated to fiscal policy. Full text of the Buba's response below:
"In the most recent discussions, as before, Bundesbank President Jens Weidmann reiterated his frequently substantiated critical stance towards the purchase of government bonds by the Eurosystem.

He regards such purchases as being tantamount to financing governments by printing banknotes. Monetary policy risks being subjugated to fiscal policy. The intervention purchases must not be permitted to jeopardise the capability of monetary policy to safeguard price stability in the euro area.

If the adopted bond-purchasing programme leads to member states postponing the necessary reforms, this will further undermine confidence in the political leaders’ crisis-resolution capability. This underscores the crucial importance of ensuring both credibility in the promised conditionality and the resolute determination to immediately terminate intervention purchases if the underlying conditionality is no longer assured.

The announced interventions in the government bond market carry the additional danger that the central bank may ultimately redistribute considerable risks among various countries’ taxpayers. Such risk-sharing, however, can be legitimately authorised solely by democratically elected parliaments and governments.”
And here is the biggest irony: by doing everything in its power to keep yields artificially low and markets artificially high, the ECB is removing any urgency by Spain, Italy, Greece, actually scratch Greece, and all other countries with unsustainable primary and other deficits, to fix their problems. Which is of course perfectly understandable: why should politicians risk their careers with socially unpalatable deleveraging (please don't call it austerity) programs when they can just continue doing what they do, keep getting reelected, and hope and pray that the ECB will punish all those bond vigilantes who understand that this particular game will not have a happy ending.

In other words, in 3, 6, 12 months, all economic indicators in Europe will again deteriorate, budget deficits will be greater, and economic viability will be even more hindered, but at least the stock markets of the world will be at all time highs, and hedge funds will avoid one more quarter of redemption requests, even as every country is careening toward disaster. Because unless Spanish, and soon Italian depositors, reverse the outflow of their money from local insolvent banks and into the core of the Eurozone, then today's ECB action has achieved absolutely nothing. In that sense: all Draghi is desperately trying to do is restore confidence in these two fulcrum countries. He can only succeed if he generates enough inflation to 'inflate' away the trillions in bad debt held by domestic banks. However, in the process he will also set off the great inflationary firestorm that sees Germany shift from "9" to 'auf wiedersehen', not to mention Brent in EUR to all time records, coupled with a food price crisis.
It is this that the Bundesbank is lamenting: the ever greater trade off of meaningless short-term market gains in exchange for long-term broad collapse and potentially hyperinflation. Sadly, nobody else is, or will be until not even all the world's central banks can control the fate of the bond and stock markets any longe.
* * *
Finally, here is the intro paragraph from the first official response inGerman Welt:
Financial markets cheer the death of the Bundesbank

ECB President Draghi breaks with brazen principles of German monetary policy. The central bank is pumping unlimited money in the bond markets. Stock markets cheer - for Germany, the nightmare begins.


Spiegel: "It's Time To Ask The People What They Think"

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Several months ago we first suggested that the only outcome of the ongoing antagonism between Germany, the now Goldman-controlled European central bank hell bent on generating inflation at any cost, and the rest of Europe's insolvent states, would be a German referendum in which the German people themsleves are asked what they think of the current mess Europe finds itself in. Naturally, days like today, when the ECB does away with inflationary caution and returns to tried and failed methods - because as a reminder conditional secondary market bond purchases are nothing new, and were last tried in the summer of 2011 when Italy became the latest entrant to the SMP program, and failed - is when the impetus for referendum would be highest. Sure enough, German Spiegel has come out with an article pulling precisely on this increasingly more festering wound for the German population.
From Spiegel
It's Time to Ask the People What They Think
After World War II, the West gave Germany two great gifts. The first gift was democracy; the second gift was being integrated into a Europe of free nations. This also included the overriding vision that one day both gifts could be combined to create a democratic United States of Europe. But there was a lack of determination and strength to accomplish this. To make matters worse, both gifts have suffered from the attempt to use a common currency to integrate Europe. Postwar German democracy has never been in such a sorry state as today. It has been a long time since the peoples of Europe eyed each other with so much mistrust.
That is the current situation. Next week, Germany's Federal Constitutional Court will issue another ruling on Germany's euro policy. This is not expected to clear the air or fundamentally improve the situation. A court decision cannot accomplish that. But something must happen. We cannot allow both democracy and Europe to go to rack and ruin. Democracy and European integration form the foundations of our country. The problem is that they have come into contradiction with each other. Assuming the debt mania doesn't continue to spiral out of control, it's a fact that democracy impedes a rapid rescue for the euro, while a rapid rescue for the euro undermines democracy.
Such a contradiction begs a decision. What is more important to the Germans: their democracy or Europe? Or is there a way to reconcile the two, democracy and Europe? It isn't easy. It cannot be done without risks. But there is a way.
The State of Europe
If one had to very briefly summarize what characterizes European history, it could look like this: Many of humanity's best ideas come from Europe -- such as democracy, the Enlightenment and the rule of law, along with great discoveries in the natural sciences. But all of this did not prevent Germany from sparking two world wars and carrying out the Holocaust. Despite utter devastation, the nations of Europe nevertheless managed to reconcile their differences and build the European Union.
It's no secret that Europe has always been an elite project. Many politicians in Germany thought that European unity was a good thing, and pursued it more or less surreptitiously, in any case without consulting the population. They built a Europe that suited them, without a strong parliament, but which had a strong bureaucracy and where national governments had great influence. They thought that this Europe would be so wonderful that one day its citizens would be delighted that it existed. This approach, dubbed "output legitimacy" by scholars, is based on achieving legitimacy via results.
It may not be perfect, but it's an acceptable method. Democracy is never flawless; it's never purely the rule of the people. Sometimes a country is governed contrary to the will of the people, or without taking it into account, at least for a certain amount of time. On top of the results that have been achieved, elections then provide a retroactive legitimacy.
But it was, as is now clear, a serious mistake not to link the introduction of the euro to the creation of a European financial government subject to parliamentary control. In its current form, the monetary union is no longer a success. Everyone did what they wanted. Some ran up debts that they could handle, while others ran up debts that they couldn't handle. And now we face a major crisis.
Europe is in a serious predicament. The unifying concept of peace in Europe has lost its appeal. The interests of the member states run counter to each other. Some want as much solidarity as possible in the crisis, while others want as little as possible. And there is no process to resolve these conflicts in a democratic and effective manner. Europe, then, is also in trouble.
Time to Ask the People
German democracy is suffering under Europe, while Europe is suffering under the national interests of the member states and the lack of a sensible political structure. That is the current state of democracy and Europe, the foundations of postwar Germany. What direction should we take now? Does democracy take priority over Europe? Or does Europe take priority over democracy?
There is a way to avoid this conflict. The Germans can reconcile their democracy with European integration. To do that, they would need to be asked.
Fundamentally, it is a good thing that we have a representative democracy where people go to the polls and politicians make decisions between elections. They have the expertise and the time to consider how society should best be organized. But sometimes we have to decide on the really big issues -- and then it is time to ask the people. The current crisis involves a really big question: Is the population prepared to transfer sovereignty to Europe so that effective euro policies are possible?
This doesn't mean that we have to rewrite the German constitution. It doesn't mean that we have to create a United States of Europe. For the time being, it's enough just to clarify the issue. From a legal perspective, it's not very easy, but it's possible. Where there's a will, there's a way.
The debate that would be held in the run-up to such a referendum would already be valuable in itself. Although the focus is fiscal policy, Germany would have to engage in a broader debate over what kind of Europe it wants and what its own role should be. The politicians would first have to make up their minds and then, assuming they make the right decision, campaign for greater integration. But this time they would use modern arguments in favor of Europe, such as a large shared culture, a greater say in global politics and favorable conditions for German exports.
If the politicians manage to convince the majority of the population, the German government would have a mandate to campaign in Europe for greater integration in terms of fiscal policy, in exchange for relinquishing sovereignty. It would then have a strong legitimization, a strong mandate for pro-integration policies. That would be the better scenario.
The worse scenario, of course, would also be possible -- but it wouldn't spell the end of Europe. The EU has already survived a French referendum that rejected the proposed European constitution. The German government could continue to work to help debt-stricken countries. This would be done in accordance with German budgetary law, which would not be weakened.
No matter what happens, democracy is the winner in such a referendum. The cause of European integration could win, but it could also suffer a setback. But this way the proper checks and balances are in place. After all, when push comes to shove, democracy ultimately has to come first.

and from Mark Grant......

Desperate Maladies Require Desperate Measures

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Via Mark J. Grant, author of Out of the Box,
Acts of Desperation

“Government has no other end, but the preservation of property.”

                      -John Locke

One of the primary purposes of a government, any government, is to sustain itself. In its final hours it will do almost anything possible for its self-preservation. If the rumors are to be believed and Draghi is going to propose unlimited bond buying in the short end of the curve for the nations of Europe in maturities up to three years then it must be said that Mario Draghi, personally, has re-written the treaties for the European Union which specifically forbids what he is apparently about to undertake. In my mind, this is an act of desperation that makes me quite nervous because my thinking extends out past the announcement that will be made later today as I consider its consequences, ramifications and where the focus will shift which will be to the recession in Europe and to the fundamental financial health of the nations in the European Union and then to the fundamental financial health of the European Central Bank itself.It was in January of 2010 when the yield on the Greek ten year was a 4.38% that I first stated that Greece was going bankrupt. It was several months later that I added Portugal, Ireland and Spain to the list. Three have gone and Spain is about to go and now I would add Italy to my list. The firewalls that were supposed to protect the Continent have failed miserably as exemplified by the current financial condition of both Spain and Italy. Now, in what I consider to be an act of desperation, the ECB is not only violating its mandate but putting the economics of the Continent in a perilous state and the markets are totally focused on the next few hours and not at all upon the consequences of the ECB’s decision. I am not surprised by this but I am reminded of the moments before the Lehman disaster when the relative calm did not predict the firestorm which was to ravage the world. The echoes remain; “WE SHOULD HAVE KNOWN,” and I am fearful that we may have another of these moments as people consider the consequences of the ECB’s actions incorrectly.

Unlimited bond buying in the short end of the curve means that not only will the yield curve steepen significantly but that all of the financing will take place in the “ECB Funding” part of the curve. This then means that a tremendous amount of debt accrues to the front-end of the yield curve and must be rolled regularly while the amounts will be increasing not only because of the placement of the maturities but because Spain and Italy, as examples, need to borrow ever larger amounts of money to finance themselves as they sink into worsening recessions. Since the ECB apparently is proposing to sterilize their purchases then the money supply will not be expanding and so as the debt load increases the primary funding, the national debt auctions, will have an increasing difficulty finding buyers.

The ECB’s actions also means that their balance sheet will be expanding. The ECB is already at $4 trillion, almost twice the size of the America’s Fed, and it is about grow much larger. This also has consequences. Regardless of market perception, there is no such thing as “Free Money” and the liabilities of the ECB are borne by the various central banks of Europe and by the nations that own them. As the ECB expands its balance sheet “without limit” the credit quality and the risk profile of the various owners of the ECB correspondingly declines. Peter always pays Paul in the real world and the expansion at Europe’s Central Bank is off-set with a deterioration of the national credit quality of the nations so that the entire construct sets itself up for the possibility of being downgraded by the nemeses of Europe, the ratings agencies, because they cannot control them. A “AA” Germany and/or a “AA” Europe Union is quite a different animal than a “AAA” one no matter the rhetoric of Brussels and Berlin.  

While everyone stares at Frankfurt and the last ditch effort of Mr. Draghi there have been other events which are part of this play and merit your attention. Austria has come out and stated quite succinctly that no more Austrian money will be used for other countries; any other countries. Yesterday the Netherlands stated in absolute terms that no more of their money will be used for Greece. If the condition of any ECB funding is to be the approval of the EU and the use of their Stabilization Funds then what the Mario Draghi is proposing may never come to pass, may never happen and may just be a rhetorical exercise in wand waving. If the EU refuses to fund Greece, Spain, Italy et al then under the current apparent plan, the ECB would do/could do nothing but sit and flail in the wind. I suppose that the ECB could step-up and buy all of the debt of Europe and declare the nations of Europe a “Debt Free Zone” and perhaps the markets would rally on a $100 trillion ECB but then Germany, being accountable for 22% of the ECB would have a liability of $22 trillion with an economy of $3.55 trillion but the number would never get counted in Europe because it is a contingent liability except that those who fund are not quite that dumb and some have gotten the punch-line earlier than others and are not funding now. The “condition” of all of this promised ECB funding may prevent it being actualized and this seems to be something that almost no one is taking into account.

A Frightening Possibility

To me, the world seems askew at present. China is in serious decline, Europe is in a virtual recession as Eurostat releases the numbers today and points to a -0.2% contraction of the EU-17. The markets rally based upon the supposed three Saviors of the world, the central banks of the United States, Europe and Chinaand so the worse that it gets the larger the rally as the central banks will ease and ease again until some kind of wall is hit. The financial markets rest upon two tenets which are the focus of the market and the perception of those funding. The Great Depression is largely thought to have been sparked by the failure of an Austrian bank. We have watched Dexia, Bankia and several Austrian banks go by the wayside already and so far the markets have ignored the pattern of warning. Spain is going to be forced to the till and if funding is cut off and then if Italy arrives in the same line and various nations refuse to fund then we have arrived at the place where the rock meets the hard place and where hopes and prayers run dry.

Take what solace you may now because it may become hard to find in the not too distant future.

“It is the bright day that brings forth the adder, and that craves wary walking.”

                  -William Shakespeare, Julius Caesar

and from the ECB.... 

6 September 2012 - Measures to preserve collateral availability

On 6 September 2012 the Governing Council of the European Central Bank (ECB) decided on additional measures to preserve collateral availability for counterparties in order to maintain their access to the Eurosystem’s liquidity-providing operations.

Change in eligibility for central government assets

The Governing Council of the ECB has decided to suspend the application of the minimum credit rating threshold in the collateral eligibility requirements for the purposes of the Eurosystem’s credit operations in the case of marketable debt instruments issued or guaranteed by the central government, and credit claims granted to or guaranteed by the central government, of countries that are eligible for Outright Monetary Transactions or are under an EU-IMF programme and comply with the attached conditionality as assessed by the Governing Council.
The suspension applies to all outstanding and new assets of the type described above.
The decision on the collateral eligibility of bonds issued or guaranteed by the Greek government taken by the Governing Council on 18 July 2012 is still applicable (Decision ECB/2012/14).

Expansion of the list of assets eligible to be used as collateral

The Governing Council of the ECB has also decided that marketable debt instruments denominated in currencies other than the euro, namely the US dollar, the pound sterling and the Japanese yen, and issued and held in the euro area, are eligible to be used as collateral in Eurosystem credit operations until further notice. This measure reintroduces a similar decision that was applicable between October 2008 and December 2010, with appropriate valuation markdowns.
These measures will come into force with the relevant legal acts.


6 September 2012 - Technical features of Outright Monetary Transactions

As announced on 2 August 2012, the Governing Council of the European Central Bank (ECB) has today taken decisions on a number of technical features regarding the Eurosystem’s outright transactions in secondary sovereign bond markets that aim at safeguarding an appropriate monetary policy transmission and the singleness of the monetary policy. These will be known as Outright Monetary Transactions (OMTs) and will be conducted within the following framework:


A necessary condition for Outright Monetary Transactions is strict and effective conditionality attached to an appropriate European Financial Stability Facility/European Stability Mechanism (EFSF/ESM) programme. Such programmes can take the form of a full EFSF/ESM macroeconomic adjustment programme or a precautionary programme (Enhanced Conditions Credit Line), provided that they include the possibility of EFSF/ESM primary market purchases. The involvement of the IMF shall also be sought for the design of the country-specific conditionality and the monitoring of such a programme.
The Governing Council will consider Outright Monetary Transactions to the extent that they are warranted from a monetary policy perspective as long as programme conditionality is fully respected, and terminate them once their objectives are achieved or when there is non-compliance with the macroeconomic adjustment or precautionary programme.
Following a thorough assessment, the Governing Council will decide on the start, continuation and suspension of Outright Monetary Transactions in full discretion and acting in accordance with its monetary policy mandate.


Outright Monetary Transactions will be considered for future cases of EFSF/ESM macroeconomic adjustment programmes or precautionary programmes as specified above. They may also be considered for Member States currently under a macroeconomic adjustment programme when they will be regaining bond market access.
Transactions will be focused on the shorter part of the yield curve, and in particular on sovereign bonds with a maturity of between one and three years.
No ex ante quantitative limits are set on the size of Outright Monetary Transactions.

Creditor treatment

The Eurosystem intends to clarify in the legal act concerning Outright Monetary Transactions that it accepts the same (pari passu) treatment as private or other creditors with respect to bonds issued by euro area countries and purchased by the Eurosystem through Outright Monetary Transactions, in accordance with the terms of such bonds.


The liquidity created through Outright Monetary Transactions will be fully sterilised.


Aggregate Outright Monetary Transaction holdings and their market values will be published on a weekly basis. Publication of the average duration of Outright Monetary Transaction holdings and the breakdown by country will take place on a monthly basis.

Securities Markets Programme

Following today’s decision on Outright Monetary Transactions, the Securities Markets Programme (SMP) is herewith terminated. The liquidity injected through the SMP will continue to be absorbed as in the past, and the existing securities in the SMP portfolio will be held to maturity.