Outright Monetary Transactions

Outright Monetary Transactions ("OMT") is a program of the European Central Bank under which the bank makes purchases ("outright transactions") in secondary, sovereign bond markets, under certain conditions, of bonds issued by Eurozone member-states.

On 2 August 2012, the Governing Council of the European Central Bank (ECB) announced that it would undertake outright transactions in secondary, sovereign bond markets, aimed "at safeguarding an appropriate monetary policy transmission and the singleness of the monetary policy." The technical framework of these operations was formulated on 6 September 2012. On the same date, the bank's Securities Markets Programme (SMP) was terminated.

OMT is considered by the European Central Bank once a Eurozone government asks for financial assistance. The Eurozone has established the European Stability Mechanism and the European Financial Stability Facility bailout funds in order to meet the challenges of the European debt crisis. From these funds and through OMT, the Eurozone's central bank can, henceforth, buy government-issued bonds that mature in 1 to 3 years, provided the bond-issuing countries agree to certain domestic economic measures – the latter being the so-called term of "conditionality". The aim of the program is then to prevent divergence in short-term bond yields, and to ensure that the ECB’s monetary policy is transmitted equally to all the Eurozone’s member economies. The central bank notes that the OMT is meant as a means to “safeguard an appropriate monetary policy transmission and the singleness of the monetary policy.” Interventions through the program are stipulated to be potentially limitless.

So for the OMT to be activated towards a certain eurozone state, a total of four conditions need to be fully met:

Outright Monetary Transactions are not the same as quantitative easing (QE) operations, since, in the latter, the central banks buy bonds and, by doing so, inject liquidity into the banking system, with the aim of stimulating economic activity. The ECB has made clear that the principle of "full sterilisation" will apply, whereby the bank will be reabsorbing the money pumped into the system "by any means necessary." In practice, the only means of sterilisation used has been the auctioning of sufficient quantities of one-week deposits at the ECB - the same means of sterilisation that the ECB used for its previous bond-buying programme, the SMP.

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