Justify stimulus programme is needed and appropriate, German court asks ECB

The bank has more recently also announced 750 billion euros in new purchases to cushion the blow from the virus outbreak
Germany's Constitutional Court has ruled that the country's central bank must stop participating in a key European Central Bank stimulus programme but gave the ECB time to demonstrate that the stimulus programme is needed and appropriate.

The judges of the Karlsruhe-based court ruled on Tuesday that Germany's central bank, the Bundesbank, must stop buying bonds as part of an ECB stimulus programme begun in 2015 unless the ECB reaches a new decision on the programme that demonstrates its effects on the economy were proportionate.

It also said the Bundesbank should sell the bonds, but only in accord with the ECB and over the long term.

The ECB has bought more than 2.6 trillion euros ($2.9 trillion) in corporate and government bonds in an attempt to raise inflation and weak economic growth in the 19 countries that use the euro.

The programme faced objections from conservative German academics that it exceeds the bank's authority and violates a legal ban in the EU treaty on financing governments. The court found that the ECB did not violate a ban on central banks financing government spending.

The court said that the Bundesbank is barred, after a transitional period of at most three months, from participating in the implementation and carrying out of the decisions at issue, unless the ECB council demonstrates in a new decision that the goals sought by the purchase programme are not disproportionate to their economic and budgetary effects."

The bank has more recently also announced 750 billion euros in new purchases to cushion the blow from the virus outbreak.

Tuesday's court decision did not apply to that new programme, but analysts have been keeping an eye on the court case in case it calls into question the ECB's ability to intervene in markets to support the economy.

Meanwhile, the southern government bonds lost ground, pushing yields higher, after the judgment, the Reuters reported

The ruling raised concern about further expansions in ECB asset purchases, which manifested in a sharp selloff in Italian government bonds, pushing yields nearly 20 basis points to a week-and-a-half high of 1.947 per cent and leading the gap over safe-haven German Bund yields to 251 bps, the widest in around a week and a half.

"The good news is that the ruling does not seem to apply to the PEPP, but there is a bigger concern that it limits the ability of the ECB to 'do whatever it takes'," said Sarah Hewin, chief Europe economist at Standard Chartered.

Since then, Italian yields have subsided, after German Finance Minister Olaf Scholz said the ruling by Germany's top court on the ECB's bond-buying programme allows the bank to make such purchases in principle and the Bundesbank can continue to take part for now.

Among stocks, the pan-European index cut some of its gains following the ruling and was up 1.8 per cent. German shares briefly touched lows for the day. Euro zone banks halved their gains and were up 1.4 per cent.

Other southern European countries' debt also took a hit, with Spain's 10-year bond yield gap over Germany widening to 145 bps, up around 8 bps from late Monday levels. Spanish 10-year government bond yields were last up 2 bps at 0.851 per cent

As the selling pressure in peripheral bonds gathered pace, investors moved back into German bonds, allowing that market to recover from a sell-off after the court ruling. The 10-year Bund yield was last down 1.1 bps at -0.57 per cent.

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