Back
14 Jan 2015
ECB might be able to announce QE of a size they deem fit – TDS
FXStreet (Barcelona) - The TD Securities Team share that today’s European Court of Justice' ruling created a set up allowing ECB to be able to announce a QE of a size they deem appropriate and without having to share any legal constraint.
Key Quotes
“The Opinion of the Advocate General of the European Court of Justice generally cleared the OMT to be implemented if needed with only minor caveats that the ECB must not be directly involved in the financial assistance to the State concerned, it must still allow a market price to form in government bonds in primary and secondary markets, and it must clearly explain the reasons for the exceptional measures.”
“But the more important implications was in the unlikely event that the ECT seemed to put restrictions in place that would impact the ability of the ECB to buy government bonds as part of QE. In that regard, the Advocate General explicitly said that setting limits on the amount of government bond buying would call into question the effectiveness of the OMT and that granting the ECB preferential treatment to other bond holders rather than remaining pari passu would impact secondary bond markets.”
“This seems to set up the ECB to be able to announce EGB QE of a size they deem appropriate and not having to concern themselves with risk sharing as a legal constraint.”
“Moreover, the Opinion even went further to say that because of their special expertise, the ECB must have “broad discretion” in implementing monetary policy and “courts must exercise a considerable degree of caution when reviewing the ECB’s activity.””
“So while the ECB can move ahead with broader QE, this will not clear all of the uncertainty as that decision will almost undoubtedly be challenged in the courts, as well, as even today’s decisions opens scope to say the ECB has certain powers in “exceptional situations,” but would that extend to less severe times such as now.”
Key Quotes
“The Opinion of the Advocate General of the European Court of Justice generally cleared the OMT to be implemented if needed with only minor caveats that the ECB must not be directly involved in the financial assistance to the State concerned, it must still allow a market price to form in government bonds in primary and secondary markets, and it must clearly explain the reasons for the exceptional measures.”
“But the more important implications was in the unlikely event that the ECT seemed to put restrictions in place that would impact the ability of the ECB to buy government bonds as part of QE. In that regard, the Advocate General explicitly said that setting limits on the amount of government bond buying would call into question the effectiveness of the OMT and that granting the ECB preferential treatment to other bond holders rather than remaining pari passu would impact secondary bond markets.”
“This seems to set up the ECB to be able to announce EGB QE of a size they deem appropriate and not having to concern themselves with risk sharing as a legal constraint.”
“Moreover, the Opinion even went further to say that because of their special expertise, the ECB must have “broad discretion” in implementing monetary policy and “courts must exercise a considerable degree of caution when reviewing the ECB’s activity.””
“So while the ECB can move ahead with broader QE, this will not clear all of the uncertainty as that decision will almost undoubtedly be challenged in the courts, as well, as even today’s decisions opens scope to say the ECB has certain powers in “exceptional situations,” but would that extend to less severe times such as now.”