Words ought to be a little wild, for they are the assault of thoughts on the unthinking
- J.M. Keynes

Thursday, 6 September 2012

Empty OMT

The leaks were spot on. OMT (Outright Monetary Transactions) is nothing but SMP Mark II as the press release makes clear. I’ve already talked about the problems with the “new” plan in yesterday’s post (Draghi about to unveil "new" old plan). Before getting pumped full of hopium, putting in buy orders and clinking glasses full of liquidity, some additional points to consider:

Conditionality I, aka “I’ve got the bazooka but someone else has the trigger”

EFSF/ESM programme needs to be in place before OMT can be activated. The problem: Conditionality => Austerity => Economic collapse (based on Greece and Portugal). No wonder Rajoy is hesitant to submit. Rather than being an effective instrument of intervention, OMT has become contingent on politics thus hindering its ability to be deployed quickly if at all.

Conditionality II, aka “Fire and forget”

Non-compliance with imposed conditions will lead to termination of the programme. Very strict and disciplined Mr Draghi. Just one question, what happens to the bonds already bought? Suppose ECB buys €100bn of Italian debt and then Berlusconi traipses into power and Bunga-Bungas the austerity measures. Will you:
  1. Double down
  2. Sell into a cratering market without regard to your dodgy assets/capital ratio
  3. Stage a coup
  4. Resign to take a professorship at a non-European university and let Jens handle it
Also we’ve not heard the last of the Bundesbank. Draghi’s “near-unanimous” decision, i.e. ‘my way or the highway’ will have the German sound money establishment up in arms. Die Welt has already proclaimed the death of the Bundesbank. Given BuBa’s standing in the eyes of the German public, a reaction by them will not be ignored by Merkel especially before the 2013 elections.

Despite the trumpets today the battle is far from over. The proof of the bazooka is in the firing.

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