This morning’s European Court of Justice ruling may not have been legally binding but it could have given those that believe outright monetary transactions (OMTs) and quantitative easing (QE) do not lie within the ECBs remit a strong case.
Unfortunately for them, the ECJ appears to have ruled in favour of Mario Draghi and the members of the ECB that support both programs.
The ECJ Advocate General this morning confirmed that the OMT may be legal, although this was dependent on certain conditions being met.
In principal, it was ruled that OMTs are in line with the EU treaty as long as there is no direct involvement in financial assistance programs for the member state.
In other words, as long as the ECB is purchasing bonds on the secondary market, bond purchases are neither breaking the rules of the treaty or outside of its mandate.
It did state though that the ECB must outline the reasons for adopting the unconventional measures, something I’m sure Draghi will be more than happy to do.
The ruling has dealt a massive blow to those that oppose both policies, none more so than Jens Weidmann who, despite his softening stance on QE, has been openly against such programs on the belief that they constitute government funding.
Ruling Has Little Immediate Impact on OMT
In reality, this ruling makes little difference to the OMT program, for now at least.
No country has utilised the OMT program and all are in a much better position now than when it was announced and therefore no one is likely to.
The most important thing the OMT program did was provide an important backstop for the Eurozone which in turn brought yields on debt significantly lower.
It effectively did the job it was designed to do and I don’t think the ECB ever expected it to ever be utilised.
The reason why this ruling was so important was because of the implications it could have had for QE, which the ECB is expected to announce next week.
Draghi Now Free to Consider QE Ahead of Greek Election
Had the ECJ ruled against OMTs, Draghi would have come up against significant opposition as the two programs are very similar.
Both involve purchasing government bonds on the secondary market, which some have argued constitutes government funding.
With this hurdle now out of the way, Draghi is free to announce a bond buying program without fearing a backlash from those that previously called it illegal and outside of his remit.
Stock markets rallied following the ruling, as investors cheered the removal of another QE hurdle.
The only one that remains now is the Greek election a few days later, which is likely to influence next week’s announcement.
Whether it will delay it for another month is tough to say but the markets would suggest not. Either way, QE now looks inevitable, if not at this meeting then in March.
The only question now is how it will be implemented, with the ECB having a far tougher job that its US, UK and Japanese counterparts.
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Article by Craig Erlam, Market Analyst, Alpari.
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