German court says ECB’s bond-buying programme could violate mandate
Germany’s Constitutional Court has made the decision to refer a complaint against the European Central Bank’s flagship bond-buying programme – Outright Monetary Transactions (OMT) – to the European Court.
Germany will rule on whether OMTs violate the European Central Bank’s (ECB) mandate on 18 March.
The move could cast doubt over the credibility of the OMT programme, which allows the ECB to buy potentially unlimited numbers of government bonds.
Brought in by president Draghi in the summer of 2012, when the Eurozone economy was in dire need of stability, OMTs have been widely credited with avoiding a deflation slump. Of course, most peripheral economies are sturdier now, having returned to growth.
The ECB has responded to the German court this morning, saying that OMT are legal.
The court has said that, with more limitations in place, OMT could be constitutional. Berenberg’s Christian Schulz says: “That sounds like a “No, but” decision”.
The referral to the European court for a final decision means the programme might see more leniency.
Schulz comments:
The German court’s decision looks to be on the tough side. It could seriously dent confidence and spark new turbulences.
The final ruling will determine what limitations will be put on OMT. But the euro crisis has always been mostly about confidence and investors may not wait for the final technicalities to make up their mind.
The ECB has to quickly assess what repercussions the ruling will have for the range of tools available to calm markets.
Ironically, depending on the exact decision, the court may have made a much more wide-ranging quantitative easing programme at the ECB more likely.