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Time for ECB to save Greece

Time for ECB to save Greece

Why Draghi should consider OMT

by Iain Begg

Wed 8 Jul 2015

Mario Draghi’s July 2012 speech in London, in which he promised ‘to do whatever it takes to preserve the euro’, has been widely credited with bringing the single currency back from the brink. It is time for the European Central Bank president to attempt a similar feat for Greece.

Draghi followed up his July statement in early September 2012 with agreement on the outright monetary transactions programme for unlimited purchases of euro area government bonds. Since then, OMT has been in legal and political limbo, largely overshadowed by the quantitative easing action the bank started in March.

Greece is in a dire state after yet another inconclusive Brussels summit last night, and with officially declared bankruptcy staring it in the face. Several national parliaments seem almost certain to block state funding for fresh loans to Greece. The Greek banking system is in freefall. So it may be time to turn to OMT for the answer.

As with any bank run, a rapid response is needed to the impasse over Greek banks, yet the ECB has clearly reached the limit of what it can countenance by way of emergency liquidity assistance. A bolder solution is needed. Agreeing details could take time. Yet simply announcing that OMT is under consideration for Greece could be enough to make a crucial difference. The announcement did, after all, work wonders three years ago – although circumstances were a lot less dire than they are today.

One significant obstacle has been removed following the judgement of the European Court of Justice announced on 16 June that the ECB’s 2012 proposals are permissible under the relevant EU treaty articles and statutes.

It is worth going back to the terms the ECB originally adopted for using OMT. These are that the ECB can undertake unlimited purchases of a euro member’s bonds on the secondary market, provided the country fulfils one of two sets of conditions.

The first is that the borrower is subject to what is described as a ‘full EFSF/ESM macroeconomic adjustment programme’ of the sort to which Greece has been bound since 2010. The ESM – European Stability Mechanism – was formally introduced in October 2012 and superseded the temporary EFSF or European Financial Stability Facility from summer 2013. The second is when a country is engaged in what is described as a ‘precautionary programme’, through which it makes use of EFSF/ESM loans to resolve a more specific problem.

The double dilemma facing Greece is that the population seemingly voted against yet more austerity by choosing ‘oxi’ in last Sunday’s referendum. Yet the result does not and cannot bind its partners. At the same time cash in the banks is running out, undermining the monetary transmission mechanism and what Draghi would call the singleness of euro area monetary policy. These are precisely the conditions the ECB defined as triggering use of OMT.

Some critics would say that the ECB cannot turn to the OMT programme when there is doubt about whether Greece will default on the €3.5bn repayment owed to the ECB on 20 July on maturing bonds the institution bought from 2010 onwards. Yet if OMT is to remain part of Europe’s policy armoury, it has to be tried sooner rather than later. The time is right. It’s up to Draghi at least to consider one last throw of the dice.

Iain Begg is a Professorial Research Fellow at the European Institute, London School of Economics and Political Science and Senior Fellow on the UK Economic and Social Research Council’s initiative on The UK in a Changing Europe. He is a member of the OMFIF Advisory Board.

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