The Irish Economy

John Corrigan on OMT

Post author By Seamus Coffey
Post date November 17, 2013

In an interview broadcast today as part of RTE’s This Week show, NTMA chief executive John Corrigan made some comments on the OMT programme.

Colm Ó Mongáin: If we had applied for extra conditionality we would have qualified then for this European Central Bank bond-buying programme so was there any sense that applying for a credit line would offset the risk that were there trouble further down the line and a spike in European bond yields we would be ok because the European Central Bank would be able to buy Irish bonds?

John Corrigan: Well, the take on that is … is unclear in the sense that the OMT, which is the jargon for it, which is the programme operated by the central bank, which hasn’t been triggered yet, the precise terms and conditions for accessing that haven’t been laid down, number one. And number two, that programme is designed to address systemic issues which might arise in the markets. So, if, even still we were caught up in systemic issues as part of a wider problem to the extent that OMT was triggered we would still be in line to benefit from that.

Most of the ‘what if’ scenarios raised this week following the decision not to pursue a precautionary credit line focussed on domestic concerns about the Irish economy rather than systemic ones for the euro area.

The question seemed a perfect opportunity for John Corrigan to say that Ireland is already eligible to be considered for OMT without the necessity for the additional conditionality that a precautionary credit line might bring. He is right that “the precise terms and conditions haven’t been laid down” but we do have this very brief outline of OMT which provides some guidance on which countries are eligible to be considered for OMT.

Coverage

Outright Monetary Transactions will be considered for future cases of EFSF/ESM macroeconomic adjustment programmes or precautionary programmes as specified above. They may also be considered for Member States currently under a macroeconomic adjustment programme when they will be regaining bond market access.

It is pretty obvious that Ireland is covered by the second sentence. As part of the existent EU/IMF programme there has already been strict conditionality imposed on Irish policy for 2014. If there is an asymmetric shock that hits Ireland which can be alleviated by central bank bond purchases then the ECB’s Governing Council can decide to activate OMT for Ireland. This week’s decision had no impact on that.

As long as Ireland is “regaining bond market access” (which is admittedly subjective) then Ireland is eligible to be considered for OMT and a credit line is not a necessity for it. It is not clear to me why John Corrigan did not say as much today.

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Globalization and the Great Moderation

Post author By Kevin O’Rourke
Post date November 17, 2013

Paul Krugman has an interesting and alarming post here, in which a key question that is posed is: “So how can you reconcile repeated bubbles with an economy showing no sign of inflationary pressures?”.

I have often thought that China may provide a partial answer to the question: an elastic supply of Chinese workers meant an elastic supply of Chinese goods, that were vented onto Western markets at a fixed exchange rate and financed by internationally mobile capital. Presumably many others have said something similar in the past, since it seems like an obvious point to make. I wonder if you could make the case that similar forces were — at least at part — at work in the 1920s, with an overhang of primary products on international markets following the disruptions of World War 1 helping to keep a lid on commodity price inflation. (The international monetary context was obviously very different.)

And, while I’m not a theorist, it has often struck me that it wouldn’t be so surprising if inflationary pressures that don’t show up in commodity prices showed up in asset prices instead.

I was once at an after-dinner talk by Tommaso Padoa-Schioppa in which he said something similar, and then went on to make the point that whereas commodity price inflation is self-limiting — it makes us unhappy, and tends to lead to retrenchment by private agents and/or central banks — asset price inflation makes us happy and encourages expenditure, and is thus a process that feeds on itself (until it goes into reverse).

If there is anything to this, then when China and the rest of Factory Asia eventually hits its “Lewis point“, Western inflationary pressures may once again begin to show up in commodity price inflation. If Western economies were less able to finance imports from Asia, or if their currencies started weakening, then something similar might happen. Perhaps that wouldn’t be such a bad thing.