ECB to defend bond-buying plan in German courtroom duel


The European Central Bank will defend its bond-buying programme in a German court this week against charges it is really an illegal scheme to fund euro zone members through the back door.

ECB President Mario Draghi has called the scheme "probably the most successful monetary policy measure undertaken in recent time", and it is widely credited with restoring calm to the euro zone by easing fears of a breakup of the currency bloc.

Yet two German ECB policymakers, Bundesbank chief Jens Weidmann and ECB Board member Joerg Asmussen, will take opposing sides in arguing over its legality at the Constitutional Court hearing on Tuesday and Wednesday.

It's hard to argue with Draghi; the euro zone crisis has subsided significantly since he announced the "Outright Monetary Transactions" scheme (OMT) last year, even though the ECB hasn't yet bought a single bond of any distressed euro zone government under the programme.

Still, more than 35,000 Germans have brought a complaint against the OMT, reflecting fatigue in Europe's largest economy at having to fund the lion's share of euro zone rescues.

For Weidmann, who as German central bank president sits on the ECB's Governing Council, the programme is tantamount to printing money to finance struggling euro states. The ECB itself maintains the OMT fits within its mandate of securing price stability.

Final ruling expected after German elections

The court in the southern city of Karlsruhe, which has delivered several high profile verdicts on euro zone bailouts in recent years, is not expected to reach a final ruling on OMT until after a German parliamentary election in September.

But the judges could signal what they think of the programme and whether they feel the case falls within their jurisdiction.

The court cannot order the ECB to revoke its bond-buying programme. But in considering whether OMT violates the German parliament's sovereign right to control the budget, it could decide to challenge certain aspects of the programme, such as its "unlimited" nature.

"Any limitations in this regard could severely hamper the effectiveness of the OMT," said Barclays economist Thomas Harjes in a research note on Monday.

The programme has worked largely by giving investors the confidence to buy bonds issued by troubled countries such as Spain and Italy, assured that the ECB would intervene if any government were at serious risk of defaulting on its debt.

German media reported at the weekend that the ECB could tell the court that OMT was effectively limited to €524 billion, equivalent to the amount of short-term debt issued by Ireland, Italy, Portugal and Spain. But an ECB spokesman responded that it had "no ex-ante limits".

In earlier rulings the court has approved other euro zone bailout schemes while insisting the Bundestag lower house of parliament be consulted more fully.

For the first time since the currency was launched in 1999, an anti-euro party, the Alternative for Germany, is competing in the federal election, though it looks unlikely to win any seats.

Peter Gauweiler, a Bavarian on the eurosceptic fringe of Chancellor Angela Merkel's conservatives, has called the OMT "state financing through the ECB in clear violation of the law" and said it has only imposed a "deceptive calm" on markets.

But German economist Holger Schmieding of Berenberg Bank said Draghi's claims about the bond-buying plan's success were justified.

For his part, Asmussen warned in Germany's top-selling Bild newspaper on Monday that a court order to withdraw the programme would have "significant consequences".

The German court could decide that ECB action falls under the jurisdiction of the Luxembourg-based European Court of Justice.

However, the Karlsruhe court is more likely to approve ECB action, while asking it to make clear it is not using monetary policy to finance euro zone states' budgets, experts said.

"Building in such a requirement would not be a problem, as the ECB has not finalized the legal OMT documentation yet," said Andreas Rees, chief German economist at Unicredit Research.

The European Central Bank agreed on 6 September to launch a new and potentially unlimited bond-buying programme to lower struggling eurozone countries' borrowing costs and draw a line under the debt crisis.

ECB President Mario Draghi said the new plan, aimed at the secondary market, would address bond market distortions and "unfounded" fears of investors about the survival of the euro.

The German Central Bank is opposed to bond-buying, saying it is akin to bailing out states.

Draghi said the ECB would only help countries that signed up to and implemented strict policy conditions, with the eurozone's rescue fund also buying their bonds, and preferably with the IMF involved in designing and monitoring the conditions.

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