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.

the sting Milestones

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

New UN rights report paints bleak picture in eastern DR Congo

Rule of Law: Commission launches infringement procedure to protect the independence of the Polish Supreme Court

The key takeaways of G7 Summit in Canada

Cyprus banks under scrutiny

6.1 billion EUR for sustainable fisheries and safeguarding fishing communities

Commission opens first European Innovation Council calls worth €1 billion

Human trafficking cases hit a 13-year record high, new UN report shows

The EU heads of State and Government about the result of the European Elections 2019

As monsoon rains pound Rohingya refugee camps, UN food relief agency steps up aid

Companies need help to overcome rising

Is Europe misjudging its abilities to endure more austerity and unemployment?

EU budget: Commission helps prepare new Cohesion programmes with Regional Competitiveness Index and Eurobarometer

EU investment budget for 2020: A boost for the climate

Darfur: Inter-communal tensions still high despite improved security, Mission head tells Security Council

Impossible Brexit options: WTO or new referendum?

Work and reforms of the UN ‘at risk’, Guterres warns Member States, amidst ‘record-level’ cash crisis

Mergers: Commission approves acquisition of Raytheon by UTC, subject to conditions

This is how AI can help you make sense of the world

Calculators didn’t replace mathematicians, and AI won’t replace humans

What lies ahead for the Korean Peninsula?

The Collapse of the Brazilian Health Care System

UN chief welcomes re-opening of key Gaza border crossing

COVID-19: latest on evaluation and authorisation of vaccines

It’s getting harder to move data abroad. Here’s why it matters and what we can do

To build back better, we must reinvent capitalism. Here’s how

Iraq: UN human rights report voices concern over conduct of ISIL fighter trials

15 years of risk: from economic collapse to planetary devastation

EU should set goal to end homelessness by 2030

These countries are the most peaceful – in 3 charts

European Investment Bank to borrow €70 billion in 2013

What are antibody tests and can they get the world back to work?

What’s everyone talking about at Davos 2020?

Inaction over climate emergency ‘not an option’ says UN Assembly chief

Why nature is the most important stakeholder of the coming decade

The New Year 2016 will not be benevolent to Europe

Brussels wins game and match in Ukraine no matter the electoral results

Charges against Baha’i in Yemen must be dropped: UN experts urge release of detainees

Reusable packaging: 6 benefits beyond sustainability

COP21 Breaking News_03 December: Transport Industry Drive for Improved Energy Efficiency and Electro-Mobility to Stem High Growth of Emissions

How cultural understanding can help in the cultural shock

Why skills are keeping CEOs awake at night

These are America’s most dangerous jobs

EU to give more power to national antitrust authorities in a bid to secure regulatory fines

Does May have enough time in Parliament to table a soft Brexit deal?

Japan’s population is shrinking by a quarter of a million people every year

The beginning of a revolution in healthcare

FROM THE FIELD: Keeping Morocco’s indigenous culture and conservation in balance

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

EU prolongs economic sanctions on Russia by six months

The EU Parliament unanimously rejects Commission’s ideas about ‘seeds’

This is how a smart factory actually works

Protecting European consumers: toys and cars on top of the list of dangerous products

‘Severe’ new US asylum restrictions will put vulnerable families at risk, UN refugee agency says

Thousands returning to Nigeria’s restive Borno state ‘at risk’; UN ‘gravely concerned’

‘Stay together and step up’ action to meet Global Goals, ECOSOC President tells development forum

Commission welcomes the political agreement on the Common Provisions Regulation for shared management funds

European Business Summit 2014 Launch Event: “Energising Industrial Growth”

Everything you need to know about the coronavirus

The revenge of the fallen

How communities are dealing with economy, society and education in COVID-19 crisis     

More Stings?

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