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ECB's OMT PROGRAMME 2013

To: The Right Honourable Bundesbank President Dr. Jens Weidmann

From: Athinarayanan Sanjeevraja

Date: October 18, 2013

RE: ECB’s OMT Programme

Suggestion:
Good Morning Mr. President. Let me start by paying my respects to you and through you to.

First up all, I would like to congratulate you carry out your duty best as a Bundesbank President. As a Bundesbank President you are correct, the causes of the euro crisis lie in the high level of indebtedness and the lack of competitiveness of some member states. Now, eurozone government spending is being reduced and reforms are being introduced across southern Europe but the European financial markets don’t seem to recognise this progress and are pushing up the interest rates on sovereign bonds to elevate.

Mr. President, you argued that the OMT programme of the ECB is illegal due to the fact that it would make German tax payers liable for paying taxes to cover potential losses made by the ECB. In my opinion, German tax payers are the main beneficiaries of   the OMT programme. The objective of the ECB’s OMT programme is safeguarding an appropriate monetary policy transmission. As you knew that the situation in the eurozone was most terrible – banks access to finance was severely hampered, nominal interest rate has hugely diverged and eurozone financial system was deeply fragmented. How to fix these untenable situations? As a result, ECB implemented OMT programme and has lead to a dramatic improvement in the monetary policy transmission. From my perspective, OMT programme probably the most successful monetary measures to bring down the sovereign spreads.


Mr. President, you argued that ECB lost confidence the architecture of the monetary union. This is an erroneous to say that because OMT programme addressed a fundamental problem of monetary union as countries in the eurozone do not have direct influence on monetary policy but issue debt in euros. In my opinion, OMT programme have been the right policy for that point in time. It is erroneous to say that German tax payers may have to cover losses made by the ECB. Even the central bank could put those government bonds into the shredding machine, nothing would be lost. Indeed, it leads to losses for private holders of these bonds but not the public holders. These bonds are valued at zero but are still on the books of the central banks. In case debtor’s member state default, the ECB would stop receiving interest revenue from debtor’s countries and would stop paying out to the creditor’s government every year. I arrive at an important conclusion that nothing would be lost for public holders and has no fiscal implications. In fact your colleague at the ECB Jörg Asmussen argued that if the ECB didn’t act the eurozone risked “uncontrolled decomposition”.  

Mr. President, all member states have adhered to Maastricht Treaty which has to prevent the consequence of poor budgetary policy and have to make a concerted effort to improve Maastricht framework to ensure that member states remain in the eurozone and ensure that euro remains a strong currency forever. As a Bundesbank President and the member of European Governing Council your cooperation is must for smooth functioning of European Central Bank.    

Sincere Regards,
Athinarayanan Sanjeevraja.   
Athinarayanan Advisory Authority

Athinarayanan Twitter   

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