Tags: Europe | Bond Purchases | ECB | Treaty

European Official: ECB Bond Purchase in Line With Treaty

Wednesday, 14 Jan 2015 07:15 AM

An adviser to the European Court of Justice says the European Central Bank's offer to purchase government bonds of troubled countries — a key backstop in Europe's struggle against its debt crisis — is compatible in principle with the basic EU treaty.

The bond purchase program helped calm market turmoil that threatened to break up the euro currency union when it was announced in 2012. It was never implemented, but its mere existence reassured markets.

Opponents in Germany, however, challenged the program in court. They say the ECB overstepped its authority and violated an EU ban on the central bank directly bailing out governments.

Markets have been watching the case in part because the ECB is considering a broader bond- purchase program aimed at stimulating the economy. Markets think the ECB may announce large-scale purchases of government bonds — quantitative easing, or QE — at its Jan. 22 meeting.

Jonathan Loynes, chief European economist at Capital Economics in London, said in an email that the decision in favor of bond purchases "would seem to clear the path" for quantitative easing at that meeting.

Strategist Marc Ostwald at ADM investor Services Limited International said that while the opinion did impose some conditions on the earlier ECB program, "there is nothing in this ruling that blocks QE."

The opinion Wednesday from advocate general Pedro Cruz Villalon is preliminary, before a decision by the court's judges later this year. The court does not have to follow his opinion.

Villalon said that the ECB must have "wide discretion" in framing monetary policy and that the courts "must exercise a considerable degree of caution when reviewing the ECB's activity."

He said the ECB must meet several conditions, however. If the bond purchases are ever activated, the ECB must offer clear reasons identifying the extraordinary circumstances justifying their use. It must also avoid direct involvement in the EU financial assistance program that would be part of such purchases, and the ECB must permit markets to set prices for the bonds first before intervening.

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An adviser to the European Court of Justice says the European Central Bank's offer to purchase government bonds of troubled countries - a key backstop in Europe's struggle against its debt crisis - is compatible in principle with the basic EU treaty.
Europe, Bond Purchases, ECB, Treaty
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2015-15-14
Wednesday, 14 Jan 2015 07:15 AM
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