The Eurozone designs a halfway house

Setting out the framework for the ECB’s Outright Monetary Transactions (OMT) on Thursday, the ECB said

They may also be considered for Member States currently under a macroeconomic adjustment programme when they will be regaining bond market access.

Certainly helpful for Ireland and Portugal to have that backstop. What’s not quite so clear is how the conditionality would be applied. The countries would be selling bonds as a path to exit from their existing Troika programme and the programme would presumably expire as the final disbursements were made and the original programme conditions met. So what is the Post-Program Monitoring (as the IMF might say) for those countries?

The ECB statement points towards an Enhanced Conditions Credit Line as the framework. The recently updated EFSF FAQ explains that facility —

Access open to all euro area Member States whose general economic and financial situation remains sound but faces moderate vulnerabilities that preclude access to a PCCL. Beneficiary must adopt, after consultation with EC and ECB, corrective measures aimed at addressing weaknesses.

while the PCCL is

Access limited to a euro area Member State whose economic and financial situation is fundamentally sound, as determined by respecting eligibility criteria (sustainable public debt, respect of SGP and EIP commitments, track record of access to capital markets on reasonable terms)

So these facilities are intended to keep countries out of a programme. However with the EU’s record of creative interpretation of previous agreements, it would be a tiny stretch to soon say that the ECCL becomes a relapse-prevention facility, and then the ECB can backstop the secondary bond market for these just-back-on-their-feet countries with the needed conditonality.

One implication is that Ireland and Portugal can’t look forward with too much certainty to full programme exit even if they perform exactly as envisaged under their programmes. Another is that the Eurozone could be running a fairly large after-care facility long after the peak of the crisis has passed.

3 thoughts on “The Eurozone designs a halfway house

  1. I’m more troubled by another sentence there.
    The OMT will be conditional but unlimited. On the other hand they write that no ex ante quantitative limits will be set. If it were unlimited the word “ex ante” should not be there.

  2. Great article… Applying a fix that sticks to the Eurozone is a much needed and worthy goal, but solutions are illusive, “ECCL becomes a relapse-prevention facility” is probably going to be the case, so is not the fix that’s needed.

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