ECB under fire for allegedly breaching its mandate

Ireland's promissory note deal may come back to haunt the European Central Bank (ECB) today in a German legal challenge to its crisis-era bond-buying programme.

Two days of oral arguments began this morning in Germany’s constitutional court in Karlsruhe over whether a bond-buying programme announced by the ECB last year, credited with calming financial markets, breached the Frankfurt bank’s mandate.

Critics of the so-called “outright monetary transaction” (OMT) facility say it amounts to monetary financing of states - forbidden under the ECB’s treaty -- and will draw the court’s attention to the promissory note deal as proof that the ECB has long since crossed the red line.

"Experts will be heard about how the ECB handles its mandate, in particular how it has a adopted very loose approach to forbidden state financing," said Prof Dietrich Murswiek, representing one of the complainants today, to The Irish Times. "As a core element in this matter, the recent case of Ireland will be raised."

Last summer ECB president Mario Draghi’s announced that his institution was ready to buy-up on secondary markets as many bonds of crisis-hit countries as necessary to calm euro zone waters. The OMT programme has yet to be activated but the announcement eased market speculation about the currency’s future.

German complainants say the unlimited bond-buying facility presents a risk to the German taxpayer but, with the OMT facility not active, they face the challenge of demonstrating a concrete risk from theoretical concerns.

To help make their case, they will draw a line from OMT back to the promissory note deal.

In February the Government swapped the promissory notes, emergency bank loans used to recapitalise Anglo Irish Bank and Irish Nationwide, for long-term bonds.

The deal extended the repayment period for the loans and and cut the annual cost of servicing the debt. At the time, the European Central Bank in Frankfurt “unanimously took note” of the deal but declined to comment further. Behind the scenes, however, officials in Frankfurt and in Dublin conceded the legality of both the original and retooled promissory note deals was questionable.

Prof Murswiek, representing the Bavarian politician and veteran Karlsruhe complainant Peter Gauweiler, will argue that, as with Ireland’s promissory note deal, the aim of OMT bond-buying is not price stability -- the ECB’s core mandate -- but to create alternative financing terms for member states parallel to financial markets.

Last September, in their ruling on the ESM bailout fund, the Karlsruhe judges ruled that it was “forbidden ... for the ECB to buy sovereign bonds on the secondary markets aimed at an independent financing of state budgets”.

Ahead of the hearing, the European Central Bank warned the court that raising too many questions about the OMT programme risked returning to the uncertainty that preceded its announcement last year.

“No institution acts in a vacuum,” said ECB board member Jörg Asmussen, expected to be quizzed by Karlsruhe judges today. “If the bond programme had to be rolled back, it would have considerable consequences.”

He said OMT was Frankfurt’s way of bringing the single currency back from the “brink of a disorderly break-up”.

“The ECB ... had to make clear to all speculators: do not take on the ECB, the euro will be defended,” he said.

Mr Asmussen will argue that, alongside its primary mandate of price stability, the ECB is obliged to pursue secondary priorities such as financial stability.

In court he will describe the programme as essential, legal and effective. But he faces a dilemma: talk up the programme too much and he risks the ire of Karlsruhe; play it down or give too much away and he could undermine the programme’s perceived credibility or expose its limitations.

At the weekend a German newspaper, citing central bank sources, that it had set a euro 524 billion ceiling on the OMT scheme. The ECB has disputed this claim, saying there are “no ex-ante limits on the amount of” OMT.

Also facing questioning from Karlsruhe's red-robed judges today are Bundesbank president Jens Weidmann and German finance minister Wolfgang Schäuble.

“We have no doubt that the ECB is operating within its mandate,” said Mr Schäuble ahead of proceedings.

The ECB insisted ahead of today’s hearing that the bank was “not in the dock” in Karlsruhe. Though technically correct - Germany’s constitutional court has no jurisdiction over the Frankfurt central bank - leading German euro sceptics and bailout critics hope to convince the judges to consider the consequences of German participation in the ECB-lead programme.

Karlsruhe watchers believe the EU-friendly court is unlikely to halt the OMT programme, but they could demand safeguards or, if in doubt, refer the case to the European Court of Justice in Luxembourg.

In his opening remarks, constitutional court president Andreas Voßkuhle said his institution was not concerned with the economic sense or apparent success of the OMT in calming financial markets.

“To be clarified is whether the ECB has staked a claim on competences which have not been, or may not be, transferred to it,” he said.

After hearings today and tomorrow, a verdict is not expected until after Germany’s general election in September.