Tuesday we head over to the red tops in the German constitutional court to hear the latest on the ECB's OMT

Hi ho, hi ho, it's off to Germany we go...

The next episode of the ECB's OMT soap opera starts tomorrow as the German constitutional court takes a close look at the European Court of Justice's ruing that came last year.

Previously on OMT - "The fight over the program that's never been used"

Here's the background to the whole saga;

What is the OMT?

The Outright Monetary Transactions program was unveiled back in 2012 as part of Mario Draghi's famous "do whatever it takes" announcement, when the Eurozone looked in danger of disappearing up its own behind.

The program was designed to let the ECB buy bonds of a distressed member state in the secondary market, for the purpose of "safeguarding an appropriate monetary policy transmission and the singleness of the monetary policy". Countries would have to ask for assistance and accept certain economic measures for the program to go online. The main basic aim of the program was to keep problem state bond yields from blowing up in the event of another crisis

Who was complaining?

The Germans initially took up the legal challenge saying it breached the ECB's mandate and broke both German and EU law. The case was brought to the German constitutional court. The court's initial view was that it was illegal and incompatible with German and EU law but as it could only rule on German domestic law, they passed the case on to the European Court of Justice

How long did we have to watch paint dry?

After the German legal wheels stopped turning for months, the constitutional court finally referred the case to the ECJ in early 2014. We then had to wait until April 2014 before the ECJ issued an "opinion" on the case

The EU Advocate General Pero Cruz Villalon announced that the OMT program could be in line with EU law if certain conditions were met and set the June 15th 2015 ruling date

How did the ECJ rule in its judgement?

The ruling in June 2015 largely followed the Advocate General's advisory and said that:

  • Purchase of govt bonds on secondary markets must not have an effect equivalent to that of a direct purchase of such bonds on the primary market
  • When the ECB purchases govt bonds on secondary markets sufficient safeguards must be built in to ensure that it does not contravene prohibition of monetary financing

The ECB welcomed the decision but the Germans are still far from dropping this bone.

What's happening now?

While most national courts are likely to agree with the ECJ ruling, the German constitutional court are now going to hear further arguments regarding Germany's role in the OMT. The court will be taking another look at lawsuits brought over the OMT program to see how they stack up with the ECJ ruling. While the court can't rule over the ECB directly, it does hold sway over the German government and Bundesbank, and thus Germany's involvement. Bloomberg notes that there are also three other QE cases that the court could issue guidelines on.

I shouldn't think there is much market interest in this but we should be prepared for some headlines that could move the euro, particularly if they focus on Germany having a limited role in the program or that the court strongly disagrees with the ECJ ruling and sides with the those bringing the cases.

OMT - The never ending story