Outright Monetary Transaction                          Roshankumar S Pimpalkarroshankumar.2007@rediffmail.com
On 6th September, the ECB announced that it will buy unlimitedamounts of sovereign debt from troubled countries of the eur...
spiral beyond control, one should bear in mind that higher liquiditycould see money getting diverted towards commodities, ...
Upcoming SlideShare
Loading in …5
×

Outright monetary transaction

411 views

Published on

Published in: Health & Medicine, Business
0 Comments
0 Likes
Statistics
Notes
  • Be the first to comment

  • Be the first to like this

No Downloads
Views
Total views
411
On SlideShare
0
From Embeds
0
Number of Embeds
2
Actions
Shares
0
Downloads
2
Comments
0
Likes
0
Embeds 0
No embeds

No notes for slide

Outright monetary transaction

  1. 1. Outright Monetary Transaction Roshankumar S Pimpalkarroshankumar.2007@rediffmail.com
  2. 2. On 6th September, the ECB announced that it will buy unlimitedamounts of sovereign debt from troubled countries of the euro zone,subject to certain conditions. The ECB has named this facility “OutrightMonetary Transaction” or OMT. When we say that the ECB will buydebt, in other words it means that the ECB will buy government bondsof troubled economies of the euro zone. What this means that countrieson the brink, will get the much needed liquidity. However, simply byinfusing liquidity, would the troubled economies see their painevaporate? Is it enough to inject liquidity or is there something else thatis the need of the hour? To get a better insight into this problem, letslook at the following example:- Lets say Raju is a brilliant lad. He is 20 years old and goes to a one ofthe most prestigious colleges of the city. His father is the CEO of acompany and he lives in one of the best locations in the city. Everythingseems to be on track for Raju except for one problem. Raju suffers fromobesity. His weight weighs him down and prevents him to attain thepotential that he deserves. There is a constant tussle between his healthand weight and of late, his health has been on the receiving end. Rajuhas been suffering from intense back pain. And the doctor has attributedthis to his obesity. But because the pain is so intense, the doctorprescribes pain killers which gives Raju immediate relief. So Rajucontinues to live life and does little to cut down his weight. As a result ofhis lackadaisical ways, the back pain returns with increased intensity.This time when he visits his doctor, he is advised bed rest along withpain killers. Moreover, the doctor tells him that the bed rest and painkillers is necessary for getting relief but it not sufficient enough to curehim of the problem. For a sustained solution, he should follow adisciplined exercise and diet regime. Now let us revisit the OMT relief for the troubled economies andestablish the connection. What would be taken as the pain killer andwhat would construe to be the discipline exercise and diet regime? A closer analysis would reveal that the OMT can be interpreted to bethe “Pain-killers” while structural economic reforms and austeritymeasures would be taken to mean the disciplined regime. Moreover, this infusion of liquidity, although will give the troubledeconomies immediate relief by ensuring that their borrowing costs dontroshankumar.2007@rediffmail.com
  3. 3. spiral beyond control, one should bear in mind that higher liquiditycould see money getting diverted towards commodities, putting upwardpressure on their prices. In India, the liquidity could translate into euphoria in the stock market,for which the markets rallied by 2% after the announcement. But at thesame time, if commodity prices continue to increase it could put adversepressure on the fiscal deficit as well as cause the rupee to weaken due tocrude purchase at higher prices.roshankumar.2007@rediffmail.com

×