ECB Outright MonetaryTransaction Action In the Face of Recession Redux

euro symbolThe ECB, Europe's Central Bank, has launched a sovereign bond buying program, arguing for price stability and to make it clear the Euro is here to stay. ECB President Mario Draghi:

It is against this background that the Governing Council today decided on the modalities for undertaking Outright Monetary Transactions (OMTs) in secondary markets for sovereign bonds in the euro area. As we said a month ago, we need to be in the position to safeguard the monetary policy transmission mechanism in all countries of the euro area. We aim to preserve the singleness of our monetary policy and to ensure the proper transmission of our policy stance to the real economy throughout the area. OMTs will enable us 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. Hence, under appropriate conditions, we will have a fully effective backstop to avoid destructive scenarios with potentially severe challenges for price stability in the euro area. Let me repeat what I said last month: we act strictly within our mandate to maintain price stability over the medium term; we act independently in determining monetary policy; and the euro is irreversible.

This is an unlimited, open ended, short term maturity of one to three years, Euro area governments' bonds buy back program. The details are as warranted, dependent upon market conditions and at market value.

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.

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

The ECB will pay for these purchases by reducing the money supply by the same amount. This is known as sterilization. We can see the ECB is already defending itself against the legality of their OMT plan, since officially the ECB cannot finance governments. The ECB is going to enlist the IMF for monitoring and conditionality design for buying bonds of specific countries.

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 ECB also has some bleak GDP projections, admitting the Euro area is in recession.

Recently published statistics indicate that euro area real GDP contracted by 0.2%, quarter on quarter, in the second quarter of 2012, following zero growth in the previous quarter. Economic indicators point to continued weak economic activity in the remainder of 2012, in an environment of heightened uncertainty. Looking beyond the short term, we expect the euro area economy to recover only very gradually. The growth momentum is expected to remain dampened by the necessary process of balance sheet adjustment in the financial and non-financial sectors, the existence of high unemployment and an uneven global recovery.

The September 2012 ECB staff macroeconomic projections for the euro area foresee annual real GDP growth in a range between -0.6% and -0.2% for 2012 and between -0.4% and 1.4% for 2013. Compared with the June 2012 Eurosystem staff macroeconomic projections, the ranges for 2012 and 2013 have been revised downwards.

The OECD also is pointing to a recession in Europe:

The G7 economies are expected to grow at an annualised rate of just 0.3 percent in the third quarter of 2012 and 1.1 percent in the fourth.

The OECD projects that the euro area’s three largest economies – Germany, France and Italy – will shrink at an annualised rate of 1 percent on average during the third quarter and at 0.7 percent in the fourth.

Seen individually, the German economy is expected to contract at an annualized rate of 0.5 percent in the third quarter and at 0.8 percent in the fourth. The French outlook is slightly better, with contraction at an annualised rate of 0.4 percent in the third quarter followed by a slight pick up in growth at 0.2 percent in the fourth. In Italy, the deep recession will continue with contraction at an annualised rate of 2.9 percent in the third quarter and 1.4 percent in the fourth.

In spite of the dismal economic contraction estimates, inflation is clearly high by comparison to the United States, although seemingly dependent upon energy prices. The ECB kept interest rates at near zero, 0.75%

Euro area annual HICP inflation was 2.6% in August 2012, according to Eurostat’s flash estimate, compared with 2.4% in the previous month. This increase is mainly due to renewed increases in euro-denominated energy prices. On the basis of current futures prices for oil, inflation rates could turn out somewhat higher than expected a few months ago, but they should decline to below 2% again in the course of next year. Over the policy-relevant horizon, in an environment of modest growth in the euro area and well-anchored long-term inflation expectations, underlying price pressures should remain moderate.

The September 2012 ECB staff macroeconomic projections for the euro area foresee annual HICP inflation in a range between 2.4% and 2.6% for 2012 and between 1.3% and 2.5% for 2013. These projection ranges are somewhat higher than those contained in the June 2012 Eurosystem staff macroeconomic projections.

In spite of this is seems the ECB is still demanding austerity.

On the fiscal front, it is crucial that governments undertake all measures necessary to achieve their targets for the current and coming years. In this respect, the expected rapid implementation of the fiscal compact should be a main element to help strengthen confidence in the soundness of public finances.

Yet another condition on getting the ECB to buy those soaring yield bonds is to go to the austerity laden, draconian conditions and terms, EFSF and ESM bail out programs first. Even with the ECB stepping in to reduce the cost for governments to borrow, there is a catch, landing them smack dab into more austerity. Let's see Greece's unemployment rate is about 25% as is Spain's and now Europe is re-entering recession. Ain't austerity grand?

The adherence of governments to their commitments and the fulfillment by the EFSF/ESM of their role are necessary conditions for our outright transactions to be conducted.

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.

Greece just lost €10 billion in their government sponsored pension plan and many now face poverty. Literally retirees in Greece are committing suicide in droves.

Greece’s state-controlled pension funds saw the nominal value of their government bond holdings drop 10.7 billion euros ($13.4 billion) after the country’s debt swap earlier this year, Finance Minister Yannis Stournaras said.

It fell to 13 billion euros from 23.7 billion euros, Stournaras, citing Bank of Greece data, said in a written response to a lawmaker’s question distributed to reporters yesterday.

Greece reduced its debt by about 100 billion euros when bondholders agreed to the biggest sovereign restructuring in history in March. The debt swap and bailouts from the European Union and the International Monetary Fund aim to reduce Greek debt to 120 percent of gross domestic product by 2020 from 165 percent last year.

In other words, this program is not a guarantee, we can see the demand for austerity in spite of economic contraction and national ruination and the IMF is going to impose country-specific terms. Ouch, plus governments must come begging to the ECB and IMF.

The idea is to keep the bond prices stable so governments can at least refinance their debt at reasonable cost. Considering what has happened in Greece though, these days, what is reasonable?

Meta: 

Comments

1930s Europe if plan enacted; Bulgaria rejected Euro

Not quite sure if this is more of the same ECB big talk, followed by backtracking and denials by other key player (i.e., Germany) within 24 hours. Germany is headed towards a recession and has its own political, social, and economic issues to deal with besides apparently financing the rest of the Eurozone. Same story that props stocks up for a day or two, CNBC and Bloomberg go nuts because they can keep ignoring the fact that no real prosperity or hope when Western unemployment at 20%+ and China coming down hard, causing Australia (real estate and commodities bubbles) to also crash hard. Rest of Pacific not going to do well either. Japan still a mess.
What's interesting now is the desperation to keep the Euro going by the banksters in charge and those who profit from it. Same cast of characters at Central Banks, same alums of same Goldman.
If this is such a great deal, wouldn't the populations of these countries be going apesh*t in favor of it? Of course every chance they get they protest against these measures because it rams austerity down their throats and banksters can keep getting paid, and if payments aren't met, the banksters take state assets (like islands and buildings) and sell them for huge profits. The MSM never covers the suicides and other desperate acts in these places. General populace loses everytime, banksters behind Euro in Brussels, Frankfurt, London, NYC (and Goldman HQ) win everytime. Bulgaria just rejected joining the Euro nightmare a few days ago. Other countries repeatedly smack down these propositions for more money for other countries to save the Euro. Those countries are looking out for their people. The Euro is anti-democratic. When you have a small unelected elite alum from the same investment bank telling people to work harder in jobs that don't exist (again, the jobs are gone, people can't work harder for less if there are no jobs) in recessions + depressions or else the non-elected banksters will impose harsher lives on them, who would sign up for that? Investment bankers telling hundreds of millions of Europeans to work harder in jobs that don't exist to merely keep paying interest and to keep a currency afloat?

No, this money printing or whatever bond scheme it's called to save an anti-democratic system at the expense of the regular suffering folks will end badly. Hyperinflation with massive unemployment so that a few people can get richer and save face? History does repeat itself, and it's not that the people at the top are unaware, they just don't care as long as they get richer short-term.

You must have Javascript enabled to use this form.

If Fed pulls a QE3, inflation will be staggering esp. oil prices

If the Fed lets the greedy banksters have more free cash, watch oil prices explode. Not only because QE only helps banksters put more money into commodities and other bets with free cash, but because the situation in Egypt and Libya is going to get much worse. You can't have Ambassadors getting killed, Libya apparently unable to prevent violence with international ramifications (US/NATO helps rebels, rebels seize power, but if identity of attackers is true, Qadaffi's former loyalists still able to cause incidents with massive international ramifications) and Egypt too. Who was behind the actions in Libya and Egypt? Couldn't just be random that those two nations next to each other exploded on same day over one video on Youtube.

Add to that the fact that the German court just approved ECB BS bond scheme, and you have massive infusions of money from the ECB/Euro/ponzi that the ECB will apparently just print up, Fed free money printing for banksters, and supply restriction. Heaps and heaps of money chasing less and less oil and prepare for the nightmare.

Watching MSM, one would think the Germans and other populations love the Euro and inflation. They actually say the Germans love the Euro and other people love it. But then when a curious mind disbelieves the MSM and actually researches/knows the general populations' views, it's pretty clear the MSM is serving the Fed and other central banksters/Goldman alum/banksters. They only seem to look at Merkel, or Bernanke, or what Dimon or Blankfein or Draghi want and say. They avoid talking to the general populations at all - so much for the press and democracy. They never really discuss why Greeks and other Europeans are killing themselves, graduating college only to be unemployed and homeless, mass riots against central banks and their politicians, etc., etc. The MSM plays it like these are just disgruntled folks who want it easy and should just go along with the bankster program so banksters can get rich (ignoring the fact that all of these actions are crushing entire nations, sending food and fuel prices skyrocketing globally, and will possibly lead to global wars). But hey, I'm sure the corporate media knows what's going on, they seem to be incredibly bright and free thinkers.

You must have Javascript enabled to use this form.

Oil

Very good point with this event. On a side note, killing a U.S. Ambassador over a youtube, are you KIDDING ME????? This is such an outrage and on 9/11 no less.

Just blow diplomatic law and promise right out the window, is just a tad bit serious.

You must have Javascript enabled to use this form.

The video was just an excuse, something much bigger coming

There are plenty of excuses every day for violence if certain groups in different parts of the world want to lash out. An attack of this magnitude in neighboring countries doesn't just happen and not over some video. Especially attacking a US Embassy or Consulate or key staff with RPGs? Something like that isn't just thought of at the last second by folks walking around with RPGs. Organization had to occur, arming the groups, attacking at a specified time. We'll find out more, but Middle East not looking more stable at this point and that always has ramifications. Toss in Syria (250,000 refugees left Syria already and civil war continues with car bombings, heavy fighting in Aleppo) and effects on neighboring countries as well as US/NATO, Russia, Iran; Iran nuclear situation and US election; and it will get uglier.

You must have Javascript enabled to use this form.

looking bad for sure

Although people committing murder, against a diplomat no less, over a youtube, a cartoon are bat shit crazy in my view and what can one do. Same as those bat shit crazies in the United States who go stalk funerals with their "god hates homos" signs and such. Fortunately in the U.S. those crazies have no power and we have laws to nail 'em when they step over the legal line.

But I mean seriously, there have to be 1 million "unboxing" videos on youtube, this is when someone removes a product from it's packaging. Are you shitting me? There is so much psycho ramble bullshit out there and that's what happens when technologies enables anyone to make a video, one will get a lot of waste of digital bits.

Called freedom of speech and it seems other nations cannot stand freedom of speech and my attitude towards these people is the same as my attitude towards the crazies of this country. That's the scary thing, what is the mentality when one can whip a crowd to be murderous thugs over a crappy psycho youtube? there are millions of crappy, crazy rambling youtubes, along with 10 million youtubes of cats.

Are we literally going to have a "youtube war", are you KIDDING me? Good freaking God, what's next, attacks because someone thinks the iphone design is spreading a socialist message? I mean just bat shit crazy people out there.

You must have Javascript enabled to use this form.

True power behind the scenes just need to convince others to act

The people behind the scenes may or may not believe this position or that position, but all they need are people to act on their behalf with whatever reasoning they provide. I may or may not believe "Position 1," but if I can convince 500-500,000 people in this foreign city, or country, or whatever locale that "Position 1" is a matter of life-or-death or absolute honor vs. disgrace, then I have true power. Now, if I can then control the people or unleash the people rallying around "Position 1" and it serves my purpose that has nothing to do with "Position 1," all the better. I have helped control the people, so another power owes me, or if I don't control the people to another power's liking, then changes will be forced.

But then again, I'm not a big Wall Street bankster, or someone at policy making levels of anything, or chiming in on some TV somewhere, so what do I know.

You must have Javascript enabled to use this form.

The Euro gains based on Spanish bailout? Up is down, bad is good

Reuters and others are saying the Spanish need for a bailout is good for the Euro and that's why the Euro is gaining. Yes, because the need for such a massive country to need Euros to be printed out of thin air to keep the Ponzi going for just a little more time is somehow good for a currency's value? WTF? I really wish we had access to this free money that was printed by central banks - it always seems to end right at the top when it's handed out to banking authorities from other Goldman Sachs alum. Funny how devaluing a currency by printing it up by central banks is legal and "good," but printing up currency by regular citizens is strictly forbidden. They seem to be as valuable as each other, might as well break out the Monopoly cash at this point.

Spain is looking to freeze pensions and increase the retirement age to 67. Look for pensions to be raided by Goldman Sachs banksters in a quest for Spain to meet the bailout requirements imposed on it by the banksters. And as far as raising the retirement age, as in every other country that has destroyed jobs or sent jobs overseas (e.g., the USA), how exactly does one work longer when one is currently unemployed and there are no jobs to be had? I know questions like that may make politicians here and abroad uncomfortable because they might have to think for more than 2 seconds, but seriously, when banksters are forcing austerity on 99% of the population so that Ponzi currencies and financial regimes can keep making them richer at the expense of the populace, questions like that should be posed by at least one person that's not beholden to these money men. Or maybe 50,000 unemployed Spaniards could ask the politicians and banksters when they aren't surrounded by 500 security men that hate the little people.

You must have Javascript enabled to use this form.