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Can the European Central Bank (ECB) to buy bonds of countries that are on the verge of bankruptcy? Yes, says the European Court. Some critics see it differently. What dangers they see and what the ECB monetary policy means:. An overview
What does the verdict?
The ruling provides legal certainty for the ECB. The OMT program is considered to be protective shield of the euro zone. In an emergency, the central bankers are now allowed to buy government bonds according to the ECJ, the euro zone in order to prevent a collapse of the monetary union. The judgment stabilizes the financial markets. In summer 2012, investors were speculating on the collapse of the euro zone. Only through the OMT program calm returned to the stock markets, although it had never been implemented. Thus, the ECB has now the possibility to intervene in case it would come in the wake of the Greek crisis or a Grexit new turmoil in financial markets.
debt crisis in Europe approves European Court ECB bond purchases
The ECB may buy government bonds of individual states that are threatened by bankruptcy. The Court thus rejects a complaint from Germany.
What is the OMT bond program?
The ECB Council decided a rescue program for the Euro-zone on September 6, 2012 Design. In an emergency, when the lending rates for individual euro countries would be too high in the financial markets, the ECB would intervene in the market and purchase these government bonds. The measure would reduce interest rates again. In technical jargon, the ECB called Outright Monetary Transactions (OMT). Background of the decision at that time was the precarious situation of Italy, Spain, Portugal or Ireland. For them, the lending rates have always continued to grow in the spring and summer of 2012. On the stock markets, some speculators were betting already that the euro zone will collapse soon. Speech – July 26, 2012, ECB President Mario Draghi therefore his famous “Whatever it takes” held. He promised then that the ECB would do everything within its mandate to save the euro. Draghi added, “And believe me, it will be enough..” That was the beginning of the OMT program
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Where the point at issue is the bond program
Critics say the purchase of individual government bonds would amount to a domestic financing through the central bank equal. Bundesbank President Jens Weidmann voted for this reason the only in the Governing Council against the decision. Other Governing Council members were skeptical. The critics reached that the OMT program conditions underlying. So the country concerned an aid program must first apply to the ESM bailout fund and get approved.
A country must commit then, set economic policy reforms and budget restructuring. Only when such a tool is decided, the ECB shall decide whether it will start the OMT program. Critics interpret OMT as illegal state funding because the ECB would buy bonds of individual states – that this fund indirectly. The ECB says, they would ensure this measure of price stability. Finally, the OMT
German applicants would only be used when the financial markets were speculating on the collapse of the euro and thus the lending rates would rise unduly.
Is the monetary policy of Draghi dangerous? have brought the case before the Federal Constitutional Court. See, the ECB would illegally finance the budgets of the euro countries when they buy up their bonds. Thus the central bank overstepping their mandate, they operate no more monetary policy but is interfering with the economic policy. In addition, this would produce incalculable risks for the German taxpayer. The highest German judges gave the dispute in spring 2014 to the ECJ for consideration further.
How worked the program so far?
Only engage the announcement by the ECB that it would in an emergency, has calmed the financial markets. The OMT program has never been used. The lending rates for government bonds from the euro zone are temporarily fallen so low as never before, even as the ECB lowered its key rate to 0.05 percent. The rescue of the euro zone in 2012 so successful without the ECB invested one euro. The reason: stockbrokers lie reluctantly with a Central Bank, because the central bankers have theoretically infinite amount of money to quell any speculation in the bud
What does this have to do with the current bond purchases
Nothing. The OMT program is tailored for the real thing, to help individual states. The current government bond purchase program of the ECB, Quantitative Easing called, includes all countries. The Fed wants to September 2016 purchase bonds issued by governments in the euro zone worth 1.1 trillion euros. The purchases are made distributed after the capital key: the ECB buys thus proportionately more Bunds and French sovereign debt as Italian and Spanish papers. Thus, inflation and growth should be increased in the euro zone.
explained in the video The ECB will buy government bonds
(Video: Süddeutsche.de )
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