European Central Bank initiates OMT scheme to offer safety net to Euro

Written on:September 7, 2012
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ECB has emerged with a new bond-buying scheme to protect the Euro’s stability.

The crisis of high borrowing costs and debt difficulties, being experienced by limping Eurozone nations, has led to the European Central Bank (ECB) initiating a possibly unrestricted ‘bond-buying programme’ to decrease the Eurozone debt dilemma.

This measure would, as per ECB’s President Mario Draghi, enable to address the baseless worries of financiers, who are apprehensive about Euro’s recovery. The programme intends to give a safety net to the Euro and would concentrate on bonds maturing inside three years. However, Germany’s Bundesbank reemphasised its antipathy to this programme.

This scheme, titled Outright Monetary Transactions (OMT), will involve the ECB purchasing limitless governmental bonds of nations fighting desperately to control their arrears. ECB hopes massive acquisitions of short-term government bonds will augment their costs and decrease their interest rates/yield, which will make it less costly for nations to borrow cash.

Draghi mentioned the ECB will possess an efficient guard via OMT to kill possibly volatile scenarios. Draghi has, however, highlighted the OMT will not be a gratis lunch for economically feebler European countries like Spain and Italy.

The ECB’s OMT comes with a caution that nations, which desire the ECB help to counter their debts, must initially request emergency aid from the ‘bailout finances’ administered by 17 Euro nations. Nations desiring ECB assistance must present their financial policies for IMF’s assessment.

German Chancellor Angela Merkel has buttressed the ECB’s OMT by articulating that the ECB has acted autonomously within its mandate.

Draghi cautioned that, despite the OMT, member nations will have to propel fiscal strengthening and restructuring to increase their economies’ competitiveness. Implicit in his statements was a message that ‘public spending cuts’ have to be furthered in weak Euro economies. These cuts have caused disgruntlement in Athens and Madrid.

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