Bundesbank Letter to German Constitutional Court - English Translation

The following is an English translation of the Bundesbank's letter to the German Constitutional Court that was published by Handelsblatt.  We welcome comments on translation issues and otherwise.

Bundesbank                                                                                              December 21, 2012

Statement to the Federal Constitutional Court of Germany regarding the lawsuits with file reference 2 BvR 1390/12, 2 BvR 1421/12, 2 BvR 1439/12, 2 BvR 1824/12, 2 BvR 6/12

A.  Introduction

Within the Monetary Union of the European Union, the monetary policy framework is given by the Maastricht Treaty and the legal acts based thereon. The general principle is a stability-oriented monetary policy with the goal of price level stability which is implemented by independent central banks and to whom monetary government financing is prohibited. This reflects the experiences of those central banks which prior to the Monetary Union were independent, and able to ensure monetary stability  with a focus on price level stability. The narrow and clearly defined mandate of the central bank system recognizes the  particular constellation of the Monetary Union: a community of countries which have assigned responsibility for monetary policy over to the supranational level, but which continue to decide on fiscal and economic policy primarily at a national level, and which deliberately did not enter into a liability or transfer union. Within this scope, the protection of the common monetary policy, from, for example unsound government financing of some member states,  is ensured by the exclusion of liability for other member states, the prohibition of monetary government financing as well as the independent role of markets in the evaluation of the solvency of member states of the Monetary Union, which derives from their individual fiscal responsibility. The latter is expressed by the respective risk premia governments incur when borrowing on capital markets.

The financial and economic crisis since 2007 as well as the debt crisis in some member states of the common currency area since 2009 witnessed a considerable enlargement of the range of monetary policy instruments employed, and a strong expansion of the balance sheets of Eurosystem central banks. With these measures, the Eurosystem has made a substantial contribution to the containment of the crisis. The Bundesbank endorsed many  of the measures taken. However, the Bundesbank considers some decisions as very problematic, and has also publicly stated its criticism.

Against the background of the arguments and views newly presented during the cases at the Federal Constitutional Court of Germany, the Bundesbank hereby completes its statement. This statement focuses on the purchase of government bonds by the Eurosystem, the  TARGET2 balances, and the resulting risks of losses for the federal budget.

Why is the Legal Documentation for OMT Important?

In today's ECB Press Conference, the FT's Michael Steen asked whether the legal documents for OMT were available.  

Draghi's answer:

The second point, about the legal documentation on the OMTs, is that it is ready and is about to come out. Not today, no, but frankly, you ask me this question every time and I cannot really see the issue. What is the issue about that? Anyway, if it becomes an issue it is ready to come out. If it has to be an issue it is ready to come out. We never thought that it would be an issue.

You can also see Draghi's response here at around 29:45. 

In connection with the Greek bonds that the ECB bought, the ECB claimed an inability to accept pari passu status as a result of the prohibition on monetary financing.  However, the ECB claimed to be able to be pari passu in OMT.   So the documentation is important.   In its original press release on OMT the ECB commented:

Creditor treatment

The Eurosystem intends to clarify in the legal act concerning Outright Monetary Transactions that it accepts the same (pari passu) treatment as private or other creditors with respect to bonds issued by euro area countries and purchased by the Eurosystem through Outright Monetary Transactions, in accordance with the terms of such bonds.

The ECB has yet to "clarify in the legal act concerning [OMT]" in what way it will accept pari passu treatment with private creditors.     

Since it may require analysis and feedback, a release earlier than possibly during a crisis is sensible.   What is the benefit of the ECB's opacity on this straightforward matter?

[Update 2013.6.9:  Perhaps the ECB doesn't want to provide clarity before the BVerfG decision.   FAZ reports that the ECB has communicated to the court that the program is limited.   The ECB is also trying to create rules that keep OMT from appearing to circumvent the prohibition on monetary financing that could be triggered by buying right after a primary bond issuance.]

Three-Year LTRO - Claiming Undue Credit

Speaking in London Thursday (at 8:53), ECB President Draghi made the following claims about the impact of the three-year LTROs  (deviations from the ECB published text are in red  (published text): 

"In late 2011 and early 2012 we launched two 3-year long term refinancing operations which we called LTROs. These operations [Our LTROs]  gave banks sufficient reassurance that access to liquidity will not be a problem over a relevant planning horizon. We injected about €1tr, gross injection of liquidity with two operations which took place, one in January [sic] and the second in February of 2012.  60% of this has been repaid already. Without these operations, banks would have defaulted on their maturing obligations or would have discontinued and withdrawn existing credit lines to companies. One should remember that in the first quarter of 2012 €230bn of bank bonds were maturing and more than €300bn of soveign bonds were maturing.  That's why banks in fact stopped giving credit starting in July of 2011, and that's where a good deal of the current credit crunch comes from.  The LTROs therefore helped to avoid a major credit crunch."

This is consistent with previous claims Draghi made about how the LTROs prevented a credit crunch due to refinancing difficulties in the first quarter of 2012:

• "[E]specially the LTROs, basically avoided major disasters which were looming ahead of the funding crunch that characterised the first quarter of this year. As I have told you many times, there were bank bonds worth about €230/€260 billion falling due." December 2012
• “Let us not forget that in the first quarter of this year, more than €200 billion of bank bonds fall due. So this decision certainly prevented a potentially major funding constraint for our banking system, with all the negative consequences this might have had on the credit side.” January 2012
• “[W]ith the first LTRO, we avoided a major credit crunch.  I have already said that  €230 billion worth of bank bonds were coming due in the first quarter… [t]he LTRO addresses the quantitative shortages and liquidity constraints of certain parts of the euro area financial and banking system.” February 2012