There has much debate if and when Spain would request for a full-fledged bailout from the European Central Bank. There’s not much clarity on the International Monetary Fund’s role in the whole process.
For the ECB to officially start the Outright Monetary Transaction (OMT, which is synonymous with the bank’s unlimited bond buying program from the secondary markets) for a particular country, two conditions – apart from an independent assessment by the ECB’s governing council, need to be met separately, and the involvement of the International Monetary Fund is one of the prerequisites, explained Joerg Asmussen, an Executive Board member of the ECB.
The other condition is seeking support from the European Stability Mechanism (ESM), the region’s emergency fund, officially.
Both the ECB and the IMF stands ready to help when needed. The distressed country needs to sign a memorandum of understanding agreeing to the reform conditions before the OMT kicks in, he observed. Asked if Spain has shown any interest in seeking the central bank’s help at the ongoing summit in Tokyo, Asmussen answered in the negative.
The ECB has agreed to renounce seniority over private creditors once the OMT is activated, giving the impression the central bank is prepared to take losses. Asmussen disagreed, saying it is a wrong impression since it assumes sovereign borrowers will default. The ECB is not expecting any default by the borrowing countries and hence will not accept any haircuts, he clarified.
Portugal and Ireland recently negotiated bond redemptions with creditors and Lisbon successfully stretched its repayment commitment to October 2015 for bonds falling due in September 2013.
Does the ECB plan to start the OMT for these countries to help them slowly get back to the bond markets? Asmussen said neither of the countries would qualify for the OMT since countries must regain (if shut out) full access to the bond markets. Issuing short maturity T-bills is not enough. The ECB is working on the issue, but as of now none of the two countries qualify for the OMT program.
Asked if the permanent rescue fund, the newly launched European Stability Mechanism, will extend help to Greece to help it buy back its own bonds to avoid a default, Asmussen said Greece has received funding from the European Financial Stability Facility (the temporary emergency funding facility before ESM was launched) and it will continue to receive help from the EFSF. The review process for the next tranche of funding is still on in Athens and there are important elements missing from 2013-2014 budget plans.
Asked if he sympathizes with Greece’s request for extension of its deficit-reduction schedule, Asmussen said every county needs to be honest with the numbers. Greece still runs a primary budget deficit and an extension to help the country reach its fiscal targets would automatically mean additional external financing from its neighbors in the eurozone. The ECB can’t finance government’s fiscal deficits.
Does the OMT program takes off the convertibility risk off the table completely, thus totally eliminating chances of the euro breaking up? Asmussen said the OMT program provides a decisive backstop to any tail-risk that might be there. You can watch the video here.