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Top German court clears ECB’s OMT scheme with minor limits

Andreas Vosskuhle, President of Germany's Constitutional Court, attends the ruling on the legality of a European Central Bank emergency bond-buying scheme at the Court in Karlsruhe, Germany June 21, 2016

Germany’s Constitutional Court rejected on Tuesday a challenge of the European Central Bank’s emergency bond-buying scheme, placing only minor limits on the Bundesbank’s participation in the not-yet-used crisis fighting tool.

Conceived at the height of Europe’s debt crisis, the Outright Monetary Transactions (OMT) programme was launched as part of ECB President Mario Draghi’s pledge to do “whatever it takes” to preserve the euro, giving the bank broad powers to buy the debt of financially strained members.

The European Court of Justice has already cleared OMT but a 35,000-strong German group, including politicians and academics, asked the German court to dismantle it, arguing that it constituted illegal monetary financing, exceeded the ECB’s mandate and violated German law.

The court, however, disagreed, placing only some limits on the German central bank’s participation in the scheme and asking for government monitoring, conditions experts argue would have little implication on any possible use of OMT.

In a possible sticking point, the court said the Bundesbank can only take part in OMT if purchases volumes are limited, which may contradict the ECB’s rules that no quantitative limits would be placed on OMT before the event.

Still, the European Court last year argued that purchases are effectively limited because they are restricted to countries taking part in a bailout programme, buys are done in the secondary market and they are focused on maturities of between one and three years.

The German court also said that purchases should not be announced in advance, securities need to be held until maturity and German authorities needed to monitor any implementation of OMT.

“These limits are minor and not very problematic for the ECB,” Alexander Thiele, a professor of law at Berlin’s Free University said. “These are more or less the same limits the European Court of Justice mentioned in its own judgment last year.”

“And even if these conditions were a problem for the ECB, only the Bundesbank would be prevented from taking part and everybody else could still participate,” he added.

Experts earlier said that any limit on OMT would have no impact on the ECB’s current policies, including its flagship €1.74 trillion asset buying programme, though severe limits could dent confidence in the ECB’s crisis fighting powers.

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