German court clears ECB's OMT bond-buying programme

Germany’s Constitutional Court has cleared the European Central Bank’s emergency bond-buying scheme.

Launched at the height of the Eurozone debt crisis in 2012 as part of ECB President Mario Draghi’s commitment to do “whatever it takes” to preserve the euro, the Outright Monetary Transaction programme allowed the bank to buy the debt of financially-strained members in secondary markets.

On Tuesday, Frankfurt’s top court rejected a challenge brought by German politicians and academics, who argued that the programme violated German law and constituted illegal monetary financing.

The German court had handed the decision on to the European Court of Justice, which last year upheld the OMT programme but imposed some conditions, and then passed the case back to the German court.

The court ruled on Tuesday that the ECB must let enough time lapse between the issuance of a government bond and the central bank’s purchase in the second market, so it wasn’t participating in primary issuance.

Although the OMT programme was never actually used, its mere announcement helped to calm financial markets, pushing down the interest rates on peripheral European government bonds and allowing them to borrow money under better conditions.

Holger Schmieding, chief economist at Berenberg Bank, said the Eurozone had dodged another bullet.

“The German court shied away from open conflict with the European Court of Justice (ECJ), which approved the OMT last June already. Two days ahead of the Brexit referendum, that is at a time when the cohesion of Europe is at risk like never before in recent decades, this in itself is another piece of good news,” said Schmieding.

“All in all, the German court verdict is roughly in line with expectations. The ruling today makes it even more likely that the German court will also reject the separate legal cases against the ECB’s current active asset purchase programmes.”