Thursday, June 6, 2013

Why is the Legal Documentation for OMT Important?

In today's ECB Press Conference, the FT's Michael Steen asked whether the legal documents for OMT were available.  

Draghi's answer:

The second point, about the legal documentation on the OMTs, is that it is ready and is about to come out. Not today, no, but frankly, you ask me this question every time and I cannot really see the issue. What is the issue about that? Anyway, if it becomes an issue it is ready to come out. If it has to be an issue it is ready to come out. We never thought that it would be an issue.

You can also see Draghi's response here at around 29:45. 

In connection with the Greek bonds that the ECB bought, the ECB claimed an inability to accept pari passu status as a result of the prohibition on monetary financing.  However, the ECB claimed to be able to be pari passu in OMT.   So the documentation is important.   In its original press release on OMT the ECB commented:

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.

The ECB has yet to "clarify in the legal act concerning [OMT]" in what way it will accept pari passu treatment with private creditors.     

Since it may require analysis and feedback, a release earlier than possibly during a crisis is sensible.   What is the benefit of the ECB's opacity on this straightforward matter?

[Update 2013.6.9:  Perhaps the ECB doesn't want to provide clarity before the BVerfG decision.   FAZ reports that the ECB has communicated to the court that the program is limited.   The ECB is also trying to create rules that keep OMT from appearing to circumvent the prohibition on monetary financing that could be triggered by buying right after a primary bond issuance.]

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