ECB Official Defends Bond Purchase Plan

KARLSRUHE, Germany (AP) -- A top European Central Bank official rejected accusations that the bank had exceeded its powers while fighting the financial crisis, telling Germany's supreme court its bond-buying program was only a tool to ensure that its monetary policy works.

The Federal Constitutional Court was holding a second day of hearings to weigh allegations that the ECB's plan to purchase government bonds amounted to financing for governments, which is illegal for the central bank. Critics also say it exposes taxpayers to potential losses and threatens the ECB's independence.

Joerg Asmussen told the eight judges that the program is not meant to rescue governments in the 17-country eurozone but only to help the ECB conduct its monetary policy. It is tasked with keeping inflation close to but below 2 percent.

The bond purchase plan, agreed Sept. 6, is an offer by the ECB to buy the bonds of a government in trouble, provided they apply for that help and agree to a program of reforms in return. The program -- which no government has tapped so far -- helped lower bond market interest rates, which in troubled countries like Spain were far higher than in financially stronger ones like Germany.

Experts say the program -- dubbed Outright Monetary Transactions, or OMT -- was crucial in easing Europe's crisis over too much debt by giving leaders time to fix their finances.

Asmussen, a former German deputy finance minister who now serves on the bank's executive board, said the program helped the ECB's monetary policy function properly. That's because the high borrowing rates in financially troubled countries were preventing the ECB's low interest rates from helping the economy there. Such high borrowing rates were blocking the transmission of the ECB's policies throughout the eurozone.

"The goal of OMT is to remove the disturbed transmission mechanism," Asmussen told the judges. "It is not the goal to keep states from insolvency."

The court also heard from OMT opponent Jens Weidmann, the head of Germany's Bundesbank national central bank, who again underlined his position that the purchases spread risk of losses to all eurozone taxpayers.

The plaintiffs include a backbench lawmaker with Chancellor Angela Merkel's conservative bloc, a group of professors, a citizen's group and a left-wing opposition party.

The court is also hearing arguments regarding Germany's participation in the European Stability Mechanism, a bailout fund that can rescue troubled states with loans. In a preliminary ruling last year, the court indicated most aspects of Germany's backing for the ESM were in accord with the country's constitution.

The court could in theory bar Germany and its institutions from participating in the rescue measures, a step which could call Germany's role in the euro currency union into question.

Analysts say that is highly unlikely, but the court could add conditions to German participation that could add to uncertainty about its credibility in calming financial markets. Or the judges could refer issues to the European Court of Justice. The ECB, as an EU institution, is not being sued directly in the case.

A decision by the court is not expected for months.

Read/Post Comments (0) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2485374, ~/Articles/ArticleHandler.aspx, 9/29/2016 1:33:52 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated Moments ago Sponsored by:
DOW 18,166.79 -172.45 -0.94%
S&P 500 2,153.23 -18.14 -0.84%
NASD 5,275.90 -42.65 -0.80%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes