Draghi announces UNLIMITED short term, sterilized ‘outright monetary transactions’ focusing on the 1-3 year bonds.
- The Governing Council will consider Outright Monetary Transactions to the extent that they are warranted from a monetary policy perspective as long as programme conditionality is fully respected, and terminate them once their objectives are achieved
- Transactions will be focused on the shorter part of the yield curve, and in particular on sovereign bonds with a maturity of between one and three years
- No quantitative limits are set on the size of Outright Monetary Transactions.
- The liquidity created through Outright Monetary Transactions will be fully sterilized
We now know why gold and silver exploded overnight as news of Draghi’s announcement was obviously leaked to the bullion banks.
Full ECB Press release below:
From the ECB:
PRESS RELEASE
6 September 2012 – Technical features of Outright Monetary Transactions
As announced on 2 August 2012, the Governing Council of the European Central Bank (ECB) has today taken decisions on a number of technical features regarding the Eurosystem’s outright transactions in secondary sovereign bond markets that aim at safeguarding an appropriate monetary policy transmission and the singleness of the monetary policy. These will be known as Outright Monetary Transactions (OMTs) and will be conducted within the following framework:
Conditionality
A necessary condition for Outright Monetary Transactions is strict and effective conditionality attached to an appropriate European Financial Stability Facility/European Stability Mechanism (EFSF/ESM) programme. Such programmes can take the form of a full EFSF/ESM macroeconomic adjustment programme or a precautionary programme (Enhanced Conditions Credit Line), provided that they include the possibility of EFSF/ESM primary market purchases. The involvement of the IMF shall also be sought for the design of the country-specific conditionality and the monitoring of such a programme.
The Governing Council will consider Outright Monetary Transactions to the extent that they are warranted from a monetary policy perspective as long as programme conditionality is fully respected, and terminate them once their objectives are achieved or when there is non-compliance with the macroeconomic adjustment or precautionary programme.
Following a thorough assessment, the Governing Council will decide on the start, continuation and suspension of Outright Monetary Transactions in full discretion and acting in accordance with its monetary policy mandate.
Coverage
Outright Monetary Transactions will be considered for future cases of EFSF/ESM macroeconomic adjustment programmes or precautionary programmes as specified above. They may also be considered for Member States currently under a macroeconomic adjustment programme when they will be regaining bond market access.
Transactions will be focused on the shorter part of the yield curve, and in particular on sovereign bonds with a maturity of between one and three years.
No ex ante quantitative limits are set on the size of Outright Monetary Transactions.
Creditor treatment
The Eurosystem intends to clarify in the legal act concerning Outright Monetary Transactions that it accepts the same (pari passu) treatment as private or other creditors with respect to bonds issued by euro area countries and purchased by the Eurosystem through Outright Monetary Transactions, in accordance with the terms of such bonds.
Sterilisation
The liquidity created through Outright Monetary Transactions will be fully sterilised.
Transparency
Aggregate Outright Monetary Transaction holdings and their market values will be published on a weekly basis. Publication of the average duration of Outright Monetary Transaction holdings and the breakdown by country will take place on a monthly basis.
Securities Markets Programme
Following today’s decision on Outright Monetary Transactions, the Securities Markets Programme (SMP) is herewith terminated. The liquidity injected through the SMP will continue to be absorbed as in the past, and the existing securities in the SMP portfolio will be held to maturity.
European Central BankDirectorate Communications
Press and Information Division
Kaiserstrasse 29, D-60311 Frankfurt am Main
Tel.: +49 69 1344 7455, Fax: +49 69 1344 7404
Internet: http://www.ecb.europa.eu
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What about that word sterilized? That means any money put into the system via bond purchases will be cancelled out by withdrawing money from the system elsewhere. Is that flooding the market with euros? Doesn’t sound like it to me – and that bad for PM.
The euro and PM’s went down on Draghi’s announcement – so if the bullion banks got advanced leaked news, how come they pushed PM’s higher – did they get the market reaction wrong or did they pump up prices and then go short just before the actual announcement?
Nothing seems very transparent or obvious to me.
This is the ECB’s version of Benanke’s Operation Twist. It will accomplish nothing since Europe’s GDP numbers and economic activity are going in the tank, down single digits in Germany and double digits in the PIIGS. This is nothing but bailout printing. Sanitized? Ok, the new Euros have been sprayed with bleach. Now we have a white wash.
Andyz I am thinking that the rise in PM prices has thin support given the chances of a short interest smack down. But this rise in prices does not seem to have the power of a QE boost. It seems more like a recovery price jump since silver and gold prices went so low. We have huge amounts of capital shoshing around. When that rotates to metals then the rockets will light off. Just a guess on all that but the price increases are nice to see and they are still a good price entry point
AGXIIK says:
This is the ECB’s version of Benanke’s Operation Twist. It will accomplish nothing since Europe’s GDP numbers and economic activity are going in the tank, down single digits in Germany and double digits in the PIIGS. This is nothing but bailout printing.
If it truly is sterilized, they won’t be adding new currency to the monetary base. And I’ve seen some talk where they say that explicitly. But there are several things to watch for. Are they saying it is ‘sterilized’ because in 3 years the countries are supposed to pay back the bonds? And in 3 years (if everything goes perfect) the monetary base is back where it was at the start?
The other thing to pay attention to is this: If it really is sterilized, they have to pull the money out of somewhere else in the economy. What they are doing is dislocating the healthy parts of the economy so they can feed the sovereigns the cash they desperately need. Is that good? Probably not. It would probably be better to get the sovereigns to quit spending so much and leave the healthy parts of the economy alone.
What? 3 hours after a hugely important for PM’s announcement from Draghi/ECB, there are only 3 posts!!
Like I said in my post, the first one, nobody really knows what’s going on with this announcement.
Even the Main Stream Media has not focussed on the word sterilization. Am I the only insane person on the planet to worry about that word?
Draghi has said it straight out – purchases of PIGS Govt/bank debt, which pushes euros into the system, will be met by ECB measures to extract the same amount of euros “in other places” in the Euro financial system.
There is trickery afoot – how can the ECB put money into the system, then say they pulled it out elsewhere, so as to reduce fears of inflation? How does that make things in Europe better? Is money pumped into the system or not? Meanwhile as of this writing neither the gold or silver market is convinced about what the announcement means.
andyz says:
What? 3 hours after a hugely important for PM’s announcement from Draghi/ECB, there are only 3 posts!!
Like I said in my post, the first one, nobody really knows what’s going on with this announcement.
Agreed. This is hugely important. But once again, even the ‘detailed’ plan gives no specifics. They are jaw boning and don’t actually have a plan that can pass muster. Ultimately, they are going to have to print massive amounts of unsterilized money. But they don’t want to admit that. And probably, they can’t do that without Germany leaving the Euro.
Its a mess.
He is imitating Uncle B. Anytime somebody uses the term sterilization you should be worried. There is nothing clean when it comes to money and the balance sheets in question. That is why metals will continue to rise. Let’s just use words that everyone can understand and we will all know what is going on. Does robbing Peter to pay Paul ring any bells?
There is another very interesting matter. Draghi said he will purchase bonds with maturity less than 3 years. The market assumed he was targeting 3 year bonds. But no, it turns out he’s targeting bonds that are for instance a 10 year bond with 3 years to run before settlement, as of today. Anyone thought about that? So, while Draghi appears to be targetting short term 3 year bonds only, actually he’s even targetting a 20 year bond that has only 3 years left to settlement.
i ask the readers on this site – what does it mean for PM’s that Draghi is apparently buying only 3 year bonds, but in reality this means an excursion into even 20 year bonds with 3 years left to maturity? What about the long and short yield curves, and the relation to inflation, and apon which we PM bulls rely?
What does the PM community actually understand by today’s ECB events? Lets get some intellect going here. Meanwhile PM prices remain less than convinced as of the time of this writing – perhaps the big PM nobs who understand it all are reduced to where I sit now – what is actually going on? And why are USA stocks flying tonight? Me – I took a 3x bear on oil because I think the smoke and mirrors can’t hide the deep economic trouble the world is in right now.
@ hunkered
Yes it’s a mes.
Personal finances are no different to a country’s. If you are so overdrawn on your credit facilities that you can’t present your bank with a repayment plan, then out you go, into the homeles shelters. But the politicians and central bankers of europe will have us believe otherwise, with their technospeak and brave faced and shouting the odds representitives like Draghi. The “in trouble” countries like Spain and Italy are saying “we can pay our debts back, even as we go into recession and our tax receipts decline and our outside borrowing costs rise hugely”. Thats like you and I saying to banks “we want more credit on top of what we have, and our future income is less than what we thought – how about it?”. Who is believing this rubbish – there is no solution to bankrupt PIGS europe unless a hairdresser in Germany agrees to work to 75 to fund a laid back greek hairdresser who retires at 50. Eventually the truth of this Euro farce will come out, and where does that place us PM’s – really I’m not sure – any opinions out there?
Somebody is going to leave the Euro soon. If it is the core country members, the Euro will depreciate very quickly. But if the PIIGS get pushed out, it could go the opposite way. There are way to many variables to predict how this turns out.
Talk about shooting yourself in the foot…WOW….What else can you say…WOW!!
Draghi is going to pull off this clusterf*** of a BS deal ala operation twist even if it destroys the Euro and the economies of the Euro zone.
We can watch this cheap carnival sideshow, Draghi trying to get the bankers and politicians to believe this new three card Monti will save them all from debt destruction.
Debt does not solve insolvency.
Greek will exit after their last $15 billion hand out. After that—total destruction, greek failure, return to Drachma and depression on top of depression and a 30% collapse in the greek GDP. The total default on $250 billion in loans and $1 trillion in CDS will cripple the entire Euro banking system that is leveraged 35 to 1. Even the ECB will be bankrupt despite its attempt to print its way out this last deal breaking series of bailouts. It will take at least $5-10 trillion to sort out the Eurozone and that will buy maybe 1-2 years. The collapse after that will be cataclysmic. I doubt if the Draghi scheme will pass muster with Germany and their supreme court ruling on the ESM. Spain and its banking system failure will be so wretched that we will be talking about it for centuries. They are almost worse off than the Greeks
I hope that the Euro’s value stays stable for a bit longer so that I can get rid of mine. I finally found a way to get rid of them.