Ireland and Portugal have, recently, tested the water of the money markets with some success. Portugal has issued 5-year bonds and Ireland is in the process of converting its unbearable promissory notes into long-term bonds, to be sold to the private sector. So, on face value, two of the so-called ‘program’ Eurozone countries, wards of the EFSF and the troika, are returning to the markets.
But does this mean that they are out of the woods? Is there, in other words, any justification in saying that these two countries are closer today to exiting their ward-of-the-troika status than they were last July, before Mr Draghi’s pronouncement that he will do all it takes to save the Eurozone? The answer to both questions is, I am afraid, a resounding ‘No!’ To see why this is so, it helps to remind ourselves (a) what it means to be ‘out of the woods’, and (b) what Mr Draghi’s OMT program is and how it is affeting Italy and Spain and, through them, Ireland, Portugal.
To begin with, to be ‘out of the woods’ ought to mean a capacity to finance one’s state without relying on direct or indirect state financing by any of the troika’s branches. It means that Dublin, Lisbon, Rome, Madrid can run their own fiscal policy without the direct supervision of the troika and without reliance on the troika’s willful actions to secure the sustainability of that fiscal policy. It will be my claim, below, that none of the ‘fallen’ Eurozone states (Ireland, Portugal, Spain and even Italy) are nearer this ‘happy ending’ today than they were in July 2012.
A brief history of OMT, its nature and function
The bond market calm that broke out recently is entirely due to Mr Draghi’s OMT (outright monetrary transactions) program announcement last September. What was the purpose of the OMT? Put simply, to address the utter incapacity of the EFSF-ESM bailout fund to bail out Italy and Spain. After Germany’s rejection of any suggestion that the EFSF-ESM should be allowed to borrow more money, or that the ECB’s balance sheet should be used to lever up the EFSF-ESM’s funds, it became abundantly clear that, as Spain and Italy were being brutalised by money markets shorting their bonds, there was no way that their combined 3 trillion euro debt could be stabilised. It was at that point that Mr Draghi had to step in, somehow, to plug that gap and, effectively, signal to bond traders that further shorting of Italian and Spanish debt would lose them money.