The ECB's OMTs: A tale of governments, investors, and the central bank

Nuno Cassola and José Jorge

Journal of International Money and Finance, 2016, vol. 65, issue C, 94-116

Abstract: This paper analyses official financial assistance via ESM programmes, with and without the ECB's OMTs. As long as macroeconomic imbalances are small, ESM stand-alone programmes galvanize creditors into rolling over their loans, alleviate the liquidity crisis and help the country to implement adjustment policies. Yet the impact of fiscal consolidation and structural reforms is likely to be recessionary in the short run, since these reforms take a long time to pay off. Recessionary effects raise strategic uncertainty in the roll-over decisions of creditors, thus reducing the effectiveness of ESM liquidity assistance. With large imbalances, liquidity problems can only be overcome with credible and sizable official assistance. Adding OMTs to an ESM programme mitigates the policy dilemma, but does not fully restore investor confidence when macroeconomic imbalances are too large.

Keywords: Outright Monetary Transactions; ECB; IMF; Debtor adjustment; Coordination problems; European sovereign debt crisis (search for similar items in EconPapers)
JEL-codes: C72 D82 F33 (search for similar items in EconPapers)
Date: 2016
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jimfin:v:65:y:2016:i:c:p:94-116

DOI: 10.1016/j.jimonfin.2016.03.005

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