European Court rules that ECB’s OMT program of 2012 is OK; not a word from Germany about returning the Greek 2010 courtesy

European Parliament. Last Monday 15 June Economic and Monetary Affairs Committee MEPs met ECB President Mario Draghi and debated the ongoing Quantitative Easing program and sovereign bond purchases, among other things. Members also discussed the state of play in talks between Greece and its international creditors. Roberto Gualtieri, President of ECON Committee (on the left) gazes at Mario Draghi answering a MEP’s question. (EU Parliament Audiovisual Services, Brussels, 15/6/2015, © European Union 2015 - EP).

European Parliament. Last Monday 15 June Economic and Monetary Affairs Committee MEPs met ECB President Mario Draghi and debated the ongoing Quantitative Easing program and sovereign bond purchases, among other things. Members also discussed the state of play in talks between Greece and its international creditors. Roberto Gualtieri, President of ECON Committee (on the left) gazes at Mario Draghi answering a MEP’s question. (EU Parliament Audiovisual Services, Brussels, 15/6/2015, © European Union 2015 – EP).

Last Tuesday 16 June the European Court of Justice issued a historic decision ruling that Mario Draghi was legally correct when on 26 July 2012 speaking at the Global Investment Conference in London said the famous phrase, “…the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough”. Some weeks later, on 6 September 2012, Draghi fulfilling this promise announced the Outright Monetary Transactions (OMT), the program which authorized the European System of Central Banks (ESCB) to purchase (on the secondary markets) government bonds issued by member states of the euro area. This happened in order to save the European sovereign debt market from a breakdown.

Several groups of individuals in Germany questioned the constitutional base of the OMT program and took their action to the Bundesverfassungsgericht (Federal Constitutional Court, Germany). The parties which brought these actions maintained that the OMT (a) is not covered by the mandate of the European Central Bank and contravenes the prohibition of monetary financing of the euro area Member States and (b) that those decisions breach the principle of democracy entrenched in the German Basic Law (Grundgesetz) and thus impair German constitutional identity.

ECB was right in 2012

In its turn, the Bundesverfassungsgericht decided that it had to ask the European Court of Justice whether the EU Treaties permit the ESCB to adopt a program such as the OMT. In particular, it had doubts as to whether the program is within the powers of the ESCB, as defined by the EU Treaties, and is also uncertain about whether the program is compatible with the prohibition of monetary financing of the Member States.

With last Tuesday’s judgment, the European Court replied that the EU Treaties permit the ESCB to adopt a program such as the OMT. Understandably, this decision will be soon handed on to the German constitutional court biding it to deliver a similar judgment. In this way the German objections against ECB’s extraordinary monetary tools will be definitely settled.

The new quantitative easing

Now, let’s discuss the new quantitative easing program of the ECB of a total value of €1.14 trillion. Despite the grievances from the German Federal ministry of Finance and the country’s central bank, the Bundesbank, there was no similar legal action in Germany against the new ECB quantitative easing plan, the so-called “expanded asset purchase program”.

This new project was announced last January and includes bonds issued by euro area central governments, agencies and European institutions. It commenced on Monday 9 March and provides for a total expenditure of €1.14 trillion, effectuated in monthly installments of at least €60 billion each and is expected to span until September 2016. Its prime target is to fight deflation and stagnation in Eurozone.

All that started with the crisis

However, all those unconventional monetary tools began when the financial crisis landed on European soil, after the outburst of the US financial meltdown in the aftermath of the Lehman Brothers bankruptcy of September 2008. The first EU financial sector to be touched by this modern-day economic Armageddon was the entire European banking system, which was at the time seriously undercapitalized and overexposed to American toxic assets.

A number of EU banks started to go bust with the first one being the UK’s Northern Rock. The disease spread to mainland Europe and hit a large number of big banks. Germany, France, Belgium, Holland, Austria and many more Eurozone countries were obliged to spend trillions of euros to support their ailing banking system. The EU Commission estimates the total amount of public money spent to support the Eurozone banks at €4.5 trillion.

Then Greece came

Unfortunately, in the middle of Europe’s efforts to salvage its failing banking system and the world from complete chaos, towards the end of 2009 it became apparent that Greece, if left alone, was heading for bankruptcy. Her banks had no problem whatsoever. It was the government that had come at the edge of insolvency. At that point the ECB intervened decisively. But was it done in a just and fair manner? The answer is clearly ‘no’. Let’s recall the facts.

On 10 May 2010 the support mechanism for Greece was enacted. It contained the European Union, the International Monetary Fund and the ECB. On the same day though the ECB almost silently introduced its own ‘private’ salvation program (Securities Market Program) to support the Eurozone banks, mainly the “too big to fail” French and German lenders.

Under this ‘monetary’ tool the ECB was buying the Greek sovereign bonds from the German and French banks which were exposed to toxic Greek assets. Now talking about prices, in reality at that time there was no buyer for Greek securities at the exception of ECB. At the time those Greek bonds were sold at less than 60% of their nominal price. From the moment the ECB started buying those titles, their prices climbed immediately to close to 90%.

Saving the Franco-German lenders

At such levels of prices the French and the German banks unloaded a round sum of €80 billion to the ECB. By doing this, they also avoided the famous ‘haircut’ of 53.5% that the Greek sovereign bonds held by the private sector suffered, in February 2012. On that occasion, the Greek banks and the Greek pension system were destroyed because they collectively held a round sum of €60 billion of those securities. Alas for Greece, the ECB held bonds were exempted from this haircut because the central bank did not belong to the private sector.

The poor paid to salvage the rich

Summing up, the ECB saved the French and the German banks handing then a round sum of €80 billion in exchange of the rather worthless Greek bonds they held. No German ‘professor’ contested the 2010 flagrant monetary financing of the big German and French banks. The German academic and financial orthodoxy complained though when the ECB, by reaching the limits of its mandate in the summer-fall of 2012, introduced its OMT program to support Italy and Spain.

As for the Greek taxpayers and in a wider sense all Greeks, they are now obliged to pay the maturing bonds the ECB holds from 2010 at their nominal value. However, the ECB says it returns to the Greek government the super profit it makes out of those securities, but it’s not at all clear how it estimates this part to be handed back.

In short, the German orthodox ‘professors’ who questioned the legality of ECB’s 2012 OMT program and the ECB itself by its ‘operations’ with Greek bonds back in 2010 have both acted hypocritically to the detriment of Greeks, while salvaging the German and French banks. It’s hypocrisy squared. Ads for the EU Court of Justice a negative decision about the OMTs would have sent the entire Eurozone monetary arrangement to chaos, because before and after 2012 the ECB had applied similar tools of very important significance.

Coming to the latest developments around Greece, Germany has been rejecting a substantial support for Athens, forgetting that the Greek taxpayers saved the German lenders back in 2010. Quite unfairly, Berlin and Paris refuse now to return the 2010 courtesy Greece did to their banks.

Advertising

the sting Milestone

Featured Stings

Can we feed everyone without unleashing disaster? Read on

These campaigners want to give a quarter of the UK back to nature

How to build a more resilient and inclusive global system

Stopping antimicrobial resistance would cost just USD 2 per person a year

Retirees will outlive their savings by a decade

India’s 1.3 billion residents start 21-day lockdown – Today’s coronavirus updates

Why we need a Paris Agreement for nature

EU Facility for Refugees in Turkey: €6 billion to support refugees and local communities in need fully mobilised

How to build a paradise for women. A lesson from Iceland

New European frontiers for renewable energy development

The reason the world showed limited empathy to the Orlando victims

Health inequalities in the 21st century

Millions at risk if Syria’s war moves to last redoubt of Idlib, warns senior aid official

Me and China

UN human rights chief warns of women’s rights complacency

The entire Australian state of New South Wales is in drought

Trade war or not New York bankers will have it their way

Huge areas of the Arctic are on fire – here’s what that means for the planet

ECB with an iron hand disciplines the smaller Eurozone member states; latest victim: Greece

Urgent action needed to address growing opioid crisis

Bill Gates’ top 10 breakthrough technologies of 2019

UN expresses concern following wave of street protests in Iraq and elsewhere

The EU Consumer Policy on the Digital Market: A Behavioral Economics View

The world needs a grand coalition to tackle climate change

US, Russia oblige each other in Syria and Ukraine selling off allies

Quantum leap: why the next wave of computers will change the world

Pandemic: another look at the self

Infrastructural and system barriers to Universal Health Coverage: get in my patient’s shoes

5G mobile is nearly here – but we should share networks to make it affordable

‘No safe level of air pollution’: Major study links cardiac arrests with fine particulate matter exposure

One small flight for a drone, one ‘big leap’ for global health

Is poverty and exclusion the necessary price for EU’s recovery?

Why exchange programs are essential for the medical students of the 21st century

Road injuries leading cause of death for the young, despite safety gains: UN report

‘World has failed’ victims of genocide too often: Guterres

The MH17 tragedy to put a tombstone on Ukrainian civil war

Can we measure the temperature of human cells? A young scientist explains

We must help developing countries escape commodity dependence

“Is Europe innovative? Oh, Yes we are very innovative!”, Director General of the European Commission Mr Robert-Jan Smits on another Sting Exclusive

2016 crisis update: the year of the Red Fire Monkey burns the world’s markets down

The deforestation risks lurking in the banking sector

Novartis and Johnson & Johnson to deprive Europeans of their right to Health

October’s EU strong digital mix: From Safe Harbour to Net Neutrality, Roaming and Snowden

It’s time for global businesses to accept local responsibility

Destabilizing Lebanon after burning Syria; plotting putsch at home: King and Crown Prince of Saudi Arabia

Human rights chief calls for international probe on Venezuela, following ‘shocking accounts of extrajudicial killings’

CO2 emissions around the world

Quality Education on the table at the European Parliament

As the inventor of copy and paste dies, here are other computing innovations we take for granted

6 innovative technologies about to transform our infrastructure

Wednesday’s Daily brief: Day 3 of anti-hatred summit, UNFPA turns 50, Ben Stiller #WithRefugees, updates on Abyei

Is Data Privacy really safe seen through Commissioner’s PRISM?

Berlin vies for a Germanic European Central Bank

Parliament wants to suspend EU accession negotiations with Turkey

Changing the EU copyright law won’t bring us much closer to Digital Single Market

Top UN officials sound alarm as Yemen fighting nears vital hospital in port city of Hudaydah

Eurozone has practically entered a deflation trap

ILO’s Bureau for Employers´Activities to publish new study on women in business and management

COP21 Breaking News_05 December: Children Will Bear the Brunt of Climate Change: UNICEF

‘Unconscionable’ to kill aid workers, civilians: UN Emergency Coordinator

Ebola outbreak in DR Congo declared over, now let’s tackle other health challenges: WHO chief

Electronic cigarette: a still controversial qualitative imbalance

Ahead of State of the Union the European Youth Forum highlights lack of action on youth employment

UN chief hails ‘positive developments’ towards ending political crisis in Bolivia

More Stings?

Advertising

Speak your Mind Here

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s