AXA Group chief economist Eric Chaney has said that the European Central Bank’s new flagship intervention tool of outright monetary transactions (OMT) is, overall, a good move.
The use of OMT is designed to remove risk of a euro break-up by enabling the ECB to intervene in the sovereign markets of weaker Eurozone member countries once they have requested financial assistance from European institutions. Chaney commented: “The rationale of the ECB decision is to remove the convertibility premium (in plain English, euro exit) embedded in the price of some sovereign bonds, because this unjustified (in the ECB’s view) premium makes monetary policy ineffective in these markets. Concretely, the ECB wants to lower short- and medium-term interest rates, so that access to credit for companies and consumers would re-open.”
In a separate comment, Fidelity Worldwide Investment European sovereign credit analyst Tristan Cooper said the ECB move means that Spain must sign up to the assistance programme. “Any prevarication would lead to a big sell-off, which Rajoy can ill-afford. Then the spotlight moves to Italy, which will find it very difficult to stay out of the programme if Spain goes in,” Cooper said. He added that on balance, the new policy is positive for peripheral Europe, although it is marginally negative for Portugal and Ireland. Chaney agreed that Spain has to react to the ECB’s move, saying: “Now that the ECB has played its master card, the ball is in the camp of governments – the Spanish government to start with. Procrastinating about the request for financial assistance could be very costly, and not only for Spain.”