As weapons go, the bazooka is a pretty simple one: you take a hollow tube, shove a rocket inside, pull the trigger and watch the bang.
The bazooka the European Central Bank has pulled out today is, well, of a different order of complexity. Starting with the name. You may well remember the SMP and the LTRO. You probably know about the ESM and the EFSF. Well prepare to meet the OMT – a European bazooka which will work in conjunction with the ECCL.
Either someone at the ECB has a dark sense of humour, or the plan is to bamboozle the markets with so many mind-bogglingly complex acronyms that eventually they forget about the crisis and allow the euro to survive. Or perhaps both. Either way, the ECB’s decision today is big news: it’s a bazooka of sorts, a dramatic emergency monetary programme which is likely to reverberate for months.
And the initial market reaction was overwhelmingly positive: share prices across Europe are rising; government bond yields (the epicentre of the euro crisis, since they determine whether those countries can borrow at reasonable levels) are falling.
But, when push comes to shove, what has actually happened today? Here follows a quick Q&A.
Let’s start with the obvious: OMT?
OK, so the OMT is the Outright Monetary Transactions programme: under this the ECB will go into the secondary market and buy up troubled government debt outright in unlimited quantities. Said ECB President Mario Draghi: “We will have a fully effective backstop to avoid destructive scenarios”, adding: “The euro is irreversible.”
Yeah yeah we’ve heard that one before. So why is this programme going to succeed where all those other acronyms have failed?
Well there is of course no guarantee, and you’re right that the old Securities Markets Programme had some significant similarities with this new scheme. But according to Mr Draghi, the key differences are that:
1. It will be conditional – meaning that participating countries will have to sign up to a bailout programme with the EFSF/ESM (excuse yet acronyms, these are the official euro bail-out funds). This means the ECB could buy up a certain country’s government bonds without worrying that the relevant country won’t behave itself economically – Silvio Berlusconi is the obvious example here.
2. The ECB will be a lot more transparent, publishing how many bonds it’s buying and what the maturities are. One of the problems with the SMP is that it wasn’t particularly transparent so no-one knew which countries it was actually helping.
3. The particular maturities of loans bought up by the scheme will be different than in the SMP. Although it’s a little unclear as to why that makes this bazooka more powerful than the last one.
4. The ECB will not try to impose its seniority on the debt: in other words if a country defaults, the ECB won’t have priority over any cash the creditors manage to reclaim.
You’re saying it’s a nailed-on success?
No, that’s Mario Draghi. And there are some big question marks that still hang over it. First off, will Spain and Italy – the countries this is really aimed at, actually want to submit to a full bail-out programme, to have their economies watched over by the Troika or IMF? Granted, a full bail-out isn’t necessary for the OMT: there is a bail-out-lite called an Enhanced Conditions Credit Line, the small print for which you can find here.
But even so, Spain has so far balked at the notion of ceding its sovereignty to Brussels: is it about to start to now?
Moreover, one of the problems with the SMP which still hasn’t been addressed is that it didn’t have an explicit target for the government debt yield it wanted to get countries down to. And neither, we learnt today, will the OMT programme. And if you don’t know what it’s aiming for, it is far less predictable and reliable.
How do we know the ECB won’t just print money and “do a Weimar”?
That’s the big fear of the Bundesbank, which was the only ECB board member to vote against the decision at the governing council. And lest we forget Bundesbank chief Jens Weidmann has privately threatened to resign if the ECB headed in this direction.
According to Mr Draghi, though, the ECB will ensure that all of its bond purchases are “sterilised” – that’s central banker speak for ensuring that you don’t create money out of thin air. However, there are legitimate questions over precisely how the ECB will do that, given that its version of sterilisation isn’t exactly watertight anyway.
Any other questions I should be asking?
Well, since you ask, lots: for instance, will the IMF really want to be involved in that (we don’t yet know)? Who will ultimately have the power to pull the plug on these programmes and when? What are the long-term implications of the ECB accepting foreign currency on its balance sheet, as it will do under its new collateral terms? And, for that matter, will the ECB just accept any old junk onto its books? And then there’s the most important question: when will someone at a central bank come up with a name for an emergency monetary programme that doesn’t involve yet another dismal acronym?
This article is also available on the Sky News website.