The hardline central bank told Germany’s top court that the ECB’s pledge to shore up Italian and Spanish debt entails huge risks and violates fundamental principles. “It is not the duty of the ECB to rescue states in crisis”, it wrote in a 29-page document leaked to Handelsblatt.
The document said OMT (Outright Monetary Transactions) entails the purchase of “bad bonds”, violates ECB independence, and entails a high risk of heavy losses in the “not unlikely” event that debtor states are forced out of EMU. It said the Greek debacle had shown that conditions cannot be enforced, and, in any case, it is “very questionable” whether it is desirable to drive down the borrowing costs of profligate states.
While the Bundesbank's president, Jens Weidmann, has openly criticised the Draghi plan before, the aggressive language in the report shocked economists. The document was submitted in December but was not revealed until Friday.
Germany’s constitutional court will rule on the legality of the bond rescue plan on June 12. “If the court rules against OMT, it means the end of the euro. The stakes are so high that I don’t see how they could just pull the trigger”, said Mats Persson from Open Europe.
German historian Michael Stürmer said the tough report is a bid by the Bundesbank to “reassert its primacy”. “They have told the ECB in no uncertain terms that it is exceeding its mandate.” Prof Stürmer said the forthcoming ruling is wider than just the Draghi plan: “This is about issues of sovereignty".
"If the court sides with the Bundesbank in any way the whole house of cards could come crashing down”, said sovereign bond strategist, Nicholas Spiro.
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