This is an update to today’s weekly on Ireland and Portugal. Olli Rehn, the European Economics Commissioner has just confirmed my months’ long forecast on how the Irish and Portuguese bailouts would proceed: with an OMT-style exit mechanism and loan extensions.
The Wall Street Journal’s Matina Stevis reports:
Ireland and Portugal could apply to the European Central Bank’s bond-buying program to facilitate their full return to the financial market while exiting their bailout program, European Economics Commissioner Olli Rehn said Tuesday.
Mr. Rehn’s comments are the latest sign of support from the European Union for Ireland and Portugal as the two countries examine a range of options to lower the cost of their debt financing while preparing to re-enter international bond markets. On Monday, the two countries said that they would request an extension to the maturity of loans they received from the euro-zone’s bailout funds that were set up in 2010.
Mr. Rehn said that the European Commission, the EU’s executive, favorably viewed both access to the ECB’s Outright Monetary Transactions program and the extension of loan maturities.
It is good to see such quick confirmation of this view. Note that to get the OMT treatment, you need full market access, something Ireland will probably have but Portugal may not. As to the market impact, I still believe this is bullish for Irish bank and government bonds. But because of the now explicit OMT reference, I think it is also more bullish for Irish assets generally. I am less certain about Portugal because of their very onerous austerity program and the potential for under-performance.
On the whole, I take this as a tacit central bank – central government style coordination according at the European-wide level, very much in contradiction to the wishes of policy makers like Jens Weidmann. Expect this to continue in Europe, Japan and elsewhere as the only sustainable path to exit from this crisis.