Coeure Says ECB OMT Won’t ‘Indiscriminately’ Cut Spreads

European Central Bank Executive Board member Benoit Coeure said the Outright Monetary Transactions bond-buying program won’t be used to reduce the cost of a country’s debt below its true level.

“OMT would never be used to indiscriminately push down government bond spreads,” Coeure said in a speech in Berlin today. “Spreads should continue to reflect the underlying country-specific economic fundamentals, fiscal positions and market risk perceptions.”

The Frankfurt-based ECB announced the unprecedented bond plan a year ago as bets that the euro area would break apart multiplied. While the legality of the program is under scrutiny at Germany’s highest court, the calming of financial markets that OMT produced in the past 12 months has helped the 17-nation currency union emerge from its longest-ever recession.

“Fears of a possible euro-area breakup have receded and impairments to the transmission mechanism have been partly reduced,” Coeure said.

Opposition to the OMT program, which pledges potentially unlimited purchases of secondary-market debt from countries that sign up to economic reforms, has focused on whether it contravenes a European ban on the financing of governments by the central bank. Bundesbank President Jens Weidmann has publicly opposed it, saying it is tantamount to monetary state financing.

Court Ruling

“OMT does not correspond to the harmful scenario that motivated the monetary financing prohibition,” Coeure said. “The aim of OMTs is the exact opposite: A deterioration of fundamentals would induce the ECB to lower or even stop OMT intervention.”

Germany’s top court will likely rule on whether the OMT contravenes the nation’s constitution after federal elections scheduled for Sept. 22.

Coeure said that any use of the as-yet-untested OMT program will depend on it being in line with the central bank’s outlook for inflation.

“For the Governing Council of the ECB, there is only one single deciding criterion, and that is the maintenance of price stability in the euro area,” he said. “This overarching criterion has shaped the design of OMTs, and it will decide over its potential activation.”

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