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A "Conditional Bazooka": European Top Court Finds ECB's OMT "May Be Legal" But Must Meet Conditions

Tyler Durden's picture




 

Almost a year ago, the German top court found that ECB's OMT is "illegal", then promptly washed its hands of the final decision, kicking the ball in the court of the European Court of Justice. Moments ago, the Advocate General Pedro Cruz Villalon of the EU Court of Justice in Luxembourg delivered the non-binding opinion on issue of Mario Draghi's "unconditional" OMT.

The full opinion can be found here. Below are the details from Reuters and Bloomberg:

  • EU COURT ADVISER SAYS OMT PROGRAMME IN LINE WITH EU LAW SO LONG AS CERTAIN CONDITIONS MET

The conditions:

  • EU COURT ADVISER SAYS OMT LEGITIMATE SO LONG AS THERE IS NO DIRECT INVOLVEMENT IN FINANCIAL ASSISTANCE PROGRAMME THAT APPLIES TO STATE IN QUESTION
  • EU COURT ADVISER SAYS ECB MUST OUTLINE REASONS FOR ADOPTING UNCONVENTIONAL MEASURES SUCH AS OMT PROGRAMME

Basically, the court has allowed the ECB to drive down borrowing costs using the OMT but it can't fund bailouts. How the two will be "separated" in a world of fungible money is unclear and will likely be the basis for another court appeal. 

The conditionality clause from the Press Release:

Conditionality

 

A necessary condition for Outright Monetary Transactions is strict and effective conditionality attached to an appropriate European Financial Stability Facility/European Stability Mechanism (EFSF/ESM) programme. Such programmes can take the form of a full EFSF/ESM macroeconomic adjustment programme or a precautionary programme (Enhanced Conditions Credit Line), provided that they include the possibility of EFSF/ESM primary market purchases. The involvement of the IMF shall also be sought for the design of the country-specific conditionality and the monitoring of such a programme.

 

The Governing Council will consider Outright Monetary Transactions to the extent that they are warranted from a monetary policy perspective as long as programme conditionality is fully respected, and terminate them once their objectives are achieved or when there is non-compliance with the macroeconomic adjustment or precautionary programme.

 

Following a thorough assessment, the Governing Council will decide on the start, continuation and suspension of Outright Monetary Transactions in full discretion and acting in accordance with its monetary policy mandate.

Additionally:

  • EU COURT ADVISER SAYS IF OMT PUT INTO PRACTICE, IMPLEMENTATION MUST SATISFY NEED FOR CLEAR AND PRECISE DESCRIPTION OF EXTRAORDINARY CIRCUMSTANCES THAT REQUIRE IT
  • EU COURT ADVISER SAYS OMT PROGRAMME IS NECESSARY AND PROPORTIONATE AS ECB DOES NOT TAKE ON RISK MAKING IT VULNERABLE TO INSOLVENCY

Here is the full Default Risk section:

Default risk

 

The BVerfG also points out that a purchase of government bonds with a, to some extent foreseeably, low credit rating exposes the ECB to an excessive default risk and is therefore incompatible with Article 123(1) TFEU. Although the referring court itself recognises that the assumption of risk is inherent to the activity of a central bank, it considers that the Treaties do not authorise exposure to losses of a significant amount.

 

Once again, I refer to the reasoning set out in points 193 to 198 of this Opinion, in which I dealt in some detail with the assumption of risks by the ECB. To my mind, that reasoning may perfectly well be applied to the present aspect of the case, since, as has been observed above, the fact that there is a possibility — which purely on principle cannot be discounted — of the ECB’s insolvency or a Member State’s default does not convert the risk, on that ground alone, into a certainty. The fact that a programme for the purchase of government bonds exposes the ECB to a risk is, as one might expect, inherent in this kind of operation and, consequently, doubts as to legality need arise only when the technical conditions of the programme, or its subsequent specific implementation, confirm that the ECB is clearly faced with a default scenario.

 

In fact, the technical features of the OMT programme do not suggest that the ECB is exposed, with any degree of foreseeability, to a scenario like the one depicted by the BVerfG. It should be recalled that the central objective of the OMT programme is to stabilise the interest rates applicable to certain government bonds with the ultimate aim of restoring the instruments of monetary policy. However, the immediate objective (the reduction of the financing costs of the State concerned) itself contributes to that State recovering its ability to meet its obligations in the medium and long term. The framework in which the OMT programme would be accorded is intended to eliminate or at least reduce such a risk. As I have already pointed out in point 197 of this Opinion, the fact that, considered as a whole, the transactions announced in the OMT programme confirm the ECB’s intention of guarding against or preventing more or less irrational processes which generate or significantly increase risks, tends to establish that a measure such as that at issue does not entail circumvention of the prohibition in Article 123 TFEU.

 

I consider, in short, that that intention on the part of the ECB has been sufficiently established for it to be concluded that a purchase of government bonds — even ones with a low credit rating — which may expose the ECB to a degree of risk of default, is not as such contrary, in the circumstances described, to the prohibition of monetary financing laid down in Article 123(1) TFEU.

So the ECB does not "take on risk" - did this guy miss the whole part about how the ECB became one of the world's biggest hedge funds in recent years with its record direct and indirect holdings of European peripheral bonds? Apparently all it took was a few phone calls from Goldman and the ECB to make sure he did.

On Pari Passu status:

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.

And this is how Article 123 was just squashed:

Waiver of rights and pari passu status

 

The full or partial waiver of claims securitised in government bonds of the State subject to the OMT programme is the first feature which, according to the BVerfG, could render the programme contrary to Article 123(1) TFEU. In the referring court’s view, as in that of a number of the applicants in the main proceedings, the fact that the ECB and the central banks do not have the status of preferential creditor but rank pari passu and may be obliged to accept a full or partial waiver in the context of a restructuring agreement, (92) makes the measure into an indirect means of financing the debtor State.

 

I do not find that argument convincing. In the first place, it must be borne in mind that the risk of a full or partial waiver relates only to a future and hypothetical situation entailing the restructuring of the debtor State’s debt and is not, so to speak, an intrinsic component of the OMT programme. As I have already explained in points 193 and 194 of this Opinion, the assumption of risk is inherent in a central bank’s activity, so that an event such as that described by the referring court cannot become, merely because it might conceivably occur, a necessary consequence of implementation of the programme.

 

Moreover, the ECB has stated in its written observations that, in the context of a restructuring subject to CACs, it will always vote against a full or partial waiver of its claims. In other words, the ECB will not actively contribute to bringing about a restructuring but will seek to recover in full the claim securitised on the bond. The fact that the ECB acts with a view to preserving its claim in full confirms that the aim of its conduct is not to grant a financial advantage to the debtor State but to ensure that the latter meets the obligation it has entered into.

 

Finally, I think that the point should also be made that a purchase by the ECB, as a non-preferential creditor, of the debt securities of a Member State will inevitably involve a degree of distortion of the market, which appears to me, however, to be tolerable from the point of view of the prohibition in Article 123(1) TFEU. By contrast, as has been explained in point 183 of this Opinion, purchases made with the status of preferential creditor deter other investors, since they send out the message that a significant creditor, in this case a central bank, will be given preference over other creditors in the recovery, with the impact that that will have on demand for bonds. Accordingly, I take the view that pari passu clauses may be regarded as a means that seeks to ensure that the ECB disrupts the normal functioning of the market as little as possible, which, ultimately, involves a further guarantee of compliance with Article 123(1) TFEU.

 

I therefore consider that the fact that the ECB might be obliged — in the hypothetical event of a restructuring of a Member State’s debt — to waive, in full or in part, its claims securitised in government bonds, as a result of the OMT programme being activated, does not mean that the programme amounts to a monetary financing measure contrary to Article 123(1) TFEU.

And then some more goalseeked humor to validate the breach of Article 123:

Holding the bonds until maturity

 

The BVerfG also asserts that holding government bonds until maturity may conflict with Article 123(1) TFEU, since it reduces the number of bonds circulating on the secondary market, thereby disrupting the normal development of market prices.

 

It is true, as the BVerfG has argued, that if the ECB were to purchase government bonds under an obligation to hold them until maturity, that would give rise to a significant distortion on the secondary market for government securities. The secondary government bond market would have to reckon with the presence of an investor — the ECB — holding a substantial portfolio of government bonds which would not circulate on that market, regardless of the way in which their market price developed.

 

The ECB has, in response, emphasised that at no point in the press release of 6 September 2012 is it stated that government bonds purchased under the OMT programme will be held until maturity

Bottom line: Draghi's "unconditional" bazooka just became conditional, but it is still a bazooka, albeit one that will never actually be used since well over two years after it was revealed following Draghi's famous "whatever it takes" speech, it still has no legal termsheet or basis, and no definition on its pari passu or burden-sharing status. And it never will: after all it was merely meant as a precautionary device designed to scare away the bond vigilantes, and never to be actually implemented.

Some more from the FT:

Mr Villalón said in a statement that the ECB' should have "broad discretion" in framing and implementing the eurozone's monetary policy", and argued that legal courts therefore "must exercise a considerable degree of caution when reviewing the ECB's activity, since they lack the expertise and experience which the ECB has in this area".

 

Therefore, in Advocate General Cruz Villalón's view, the OMT programme decided upon by the ECB, as it results from the technical features described in the press release, does not infringe the principle of proportionality and may be considered lawful, provided that, in the event of the programme being implemented, the obligation to state reasons and the requirements deriving from the principle of proportionality are strictly complied with.

 

However, the advocate general did say that the OMT programme constituted an "unconventional monetary policy measure", which must comply with certain legal provisions.

 

Thus, in the event of the OMT programme being implemented, the ECB must, if the programme is to retain its character of a monetary policy measure, refrain from any direct involvement in the financial assistance programme that applies to the State concerned.

 

The Advocate General considers that the ECB must give a proper account of the reasons for adopting an unconventional measure such as the OMT programme, identifying clearly and precisely the extraordinary circumstances that justify the measure. Given that no such justification is to be found in the press release of 6 September 2012, if the programme is put into practice, both the legal act which gives it form, and its implementation, will have to satisfy those requirements relating to reasons.

So what does this mean, and how will Germany react? Here is a useful primer from SocGen which we posted several days ago explaining the next steps,and whose outcome we now know:

Where are we now? It appears the answer, absent additional details, is the red "baseline" scenario, which as SocGen noted "would undermine Draghi's promise of "whatever it takes" and leave the region more vulnerable to an eventual ressurgence of risk."

Finally some other observations via the social networks:

 

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Wed, 01/14/2015 - 05:00 | 5659068 ebworthen
ebworthen's picture

"May be legal" depending upon how much unmarked cash and diamonds are stuffed into the briefcase.

Wed, 01/14/2015 - 05:41 | 5659076 Haus-Targaryen
Haus-Targaryen's picture

Doesn't surprise me.  

I hope the BVerfG is happy with itself.  

Question; (copy/pased from down below -- thought it was good so moved it up here for all of you EST shitheads to read)

Confused..how can it be legal if there is no legal timesheet or basis?

Answer;

Because if it isn't legal, then the PIIGS bond crisis comes back later today with a vengeance, as the threat of going toe to toe with the ECB dissappears.  The amount of money to be lost by holding onto Spanish debt for example would exceed their potential upside, and would effectivly pop the sovereign debt bubble the PIIGS find themselves in now.  Everyone holding PIIGS debt will be running to close their positions while diving headlong into anything considered "safe."  Think 1.9% tBill is low -- I imagine it would go down to 0 if the OMT was rendered illegal. All bunds with a maturity rate less than 15 years would be negative. 

It would thus compound the Grexit fears (election 25 of this month) -- and would likely be the beginning of a very explosive and violent time in the world's sovereign debt bond markets as people dump PIIGS and move into USTs and Bunds.  Gilts maybe as well.  Pragmatically, it would spell the end of the EMZ absent a full Federalization of Europe, for which there are constitutional problems all over the place, and zero political will (among the people) to do so. 

Thus, the choice was either;

1) Break up the EMZ 
2) Kick the can.  

The AG opted for #2, which the ECJ will confirm.  

I doubt the AG knows anything about Macro-Finance, but just like with the BVerfG -- someone from Brussels or Frankfurt walked in and told them "If you end this, it is the end of the EUR and quite possibly the EU.  Make this work, if not, you alone flushed 60 years worth of work down the drain," or something to this extent.  Because all the justices and the AG were appointed by pro-EU governments, they will be good little "Europeans" throw out the law in favor of the "Expirment," stand up, Sieg Heil and hold hands singing "Its a Small World After All."  Brussels über alles! 

The opinion will likely contain egregious amounts of Orwellian double-speak which says essentially everything and nothing except "the OMT is now dead."  The bond market will remain "confused" about "whatever it takes" and thus continue to gorge on PIIGS debt -- kicking the can -- at least 11 more days down the road.

Ok little Greece, your turn.  Elect Syriza. 

Death to the EMZ.  

Wed, 01/14/2015 - 05:44 | 5659104 Headbanger
Headbanger's picture

No surprise is right

But it's an academic issue at this point with massive deflationary forces crushing what small stimulus would come from this futile effort.

It just doesn't fucking matter now anyway cause it just won't work!

Wed, 01/14/2015 - 05:49 | 5659110 Haus-Targaryen
Haus-Targaryen's picture

Tyler - if there was a story today that deserved to be greyed and stuck at the top -- this is definitely it. 

Wed, 01/14/2015 - 06:17 | 5659124 sodbuster
sodbuster's picture

MW cheerleaders:  ECB: OMT program is "ready and available." The Keynesians are creaming their jeans. Amazing how printing money and creating debt, passes for an economy these days.

Wed, 01/14/2015 - 06:25 | 5659130 Muh Raf
Muh Raf's picture

"Give me control of a nations currency and I care not who makes its laws". Guess who? Power is about to transfer from government and judiciary in the Eurozone. 

Wed, 01/14/2015 - 07:09 | 5659182 Oldwood
Oldwood's picture

Blah, blah, blah, security, blah, blah, confidence, blah, blah, blah, your job, blah, blah.

Go to fucking work and pay your fucking taxes...we got this covered.....

Wed, 01/14/2015 - 08:14 | 5659267 MalteseFalcon
MalteseFalcon's picture

As we learned in the US, legalities will not stand in the way of bank bail outs.

When Deutsche Bank is threatened, Germany will fold like a cheap table.

Wed, 01/14/2015 - 08:27 | 5659289 Bloppy
Bloppy's picture

500 euro notes are printed for drug smugglers anyway, right? So why not print more?

 

Boston.com (Boston Globe-owned site) on Boehner poison plot: 'perhaps his pickled liver could have filtered out the toxins':

http://tinyurl.com/o8gse84

Wed, 01/14/2015 - 05:09 | 5659071 Wait What
Wait What's picture

unconditional but conditional? sounds like we're gonna need some lawyers to hash this out over the NEXT two years.

"it depends on what the definition of 'is' is."

let the fireworks begin!! yeee hawww!!! wild card, bitches!!

https://www.youtube.com/watch?v=MYtjpIwamos

Wed, 01/14/2015 - 05:15 | 5659079 valley chick
valley chick's picture

Confused..how can it be legal if there is no legal timesheet or basis?

Wed, 01/14/2015 - 05:21 | 5659084 Haus-Targaryen
Haus-Targaryen's picture

Because if it isn't legal, then the PIIGS bond crisis comes back later today with a vengence, and compounding the Grexit fears again -- would likely be the beginning of a very explosive and violent time in the world's sovereign debt bond markets as people dump PIIGS and move into USTs and Bunds.  Gilts maybe as well.  Pragmatically, it would spell the end of the EMZ absent a full Federalisation of Europe.  

Thus, the choice was either;

1) Break up the EMZ
2) Kick the can.  

The AG opted for #2, which the ECJ will confirm.  

The opinion will likely be a lot of double-speak which says essentially everything and nothing excet "the OMT is now dead."  The bond market will remain "confused" about "whatever it takes" and thus continue to gorge on PIIGS debt.  

Greeks are up now.  

Wed, 01/14/2015 - 05:28 | 5659093 css1971
css1971's picture

Your description has about the right amount of fudge, so is probably fairly accurate.

Wed, 01/14/2015 - 05:42 | 5659103 valley chick
valley chick's picture

Thanks Haus. :-) 

Wed, 01/14/2015 - 05:45 | 5659106 Haus-Targaryen
Haus-Targaryen's picture

I moved your question up to the top and expanded a little upon it. 

Wed, 01/14/2015 - 07:16 | 5659188 Oldwood
Oldwood's picture

"whatever it takes", right?

It will be said whatever needs to be said to maintain status quo, and these folks don't need much to stay in the game as its the only game they have. No confidence means going home with your pockets empty. Ain't going to happen until people finally just say no. Bank runs are the only thing that will call their hand and that will simply take us to the next level of tyranny. Our best bet is for them to believe their pitiful lies as long as possible. The end is nearer than we think and unless you believe in a heaven, there is nothing better awaiting us on the other side. You can be right and dead right.

Wed, 01/14/2015 - 05:24 | 5659090 css1971
css1971's picture

 

EU COURT ADVISER SAYS OMT LEGITIMATE SO LONG AS THERE IS NO DIRECT INVOLVEMENT IN FINANCIAL ASSISTANCE PROGRAMME THAT APPLIES TO STATE IN QUESTION

 

Wait... What? What does this even mean? If you buy the bonds of a state, you are directly assisting the state financially.

Wed, 01/14/2015 - 05:54 | 5659112 Ghordius
Ghordius's picture

that's not how european governments and central banker see the thing. in the US case, it's very simple. the FED buys boatloads of USTs whenever necessary, and that's it. the FED is anyway so damn powerful (and the US debt mountain so immense) it can do with the UST market whatever it and the US Treasury wants (not forever, though)

the national sovereign debt mountains of europe are a different affair. there, megabanks are big enough to shake them. that's where the cries of "speculation" come up. this applies too to the FX, and various Soroses

the FED & US Treasury have the immense luxury - thanks to the global reserve status of the USD - of monetizing as much as they want. that was never the purpose of the european national banks, nor their goal, not even something contemplated as possible

but managing the price? of course. a bear raid on the national debt is a "financial attack", and OMT-like things the response to it. the "direct assistance to the state" is a side-product, not the goal

the real goal is to maintain the mountains. through balanced budgets and balanced trading accounts. the real goal is to be independent from the huge fluctuations, the immense tides of the USD

you will never understand the "why?" of the EUR if you don't understand how foreigners experienced the USD since 1971, particularly it's gargantuan tides and ebbs, which are becoming bigger every time

Wed, 01/14/2015 - 06:19 | 5659125 css1971
css1971's picture

No offence Ghordius, but it's much, much simpler than that. It's pure human nature.

It's a diet regime. You're trying to lose weight so you set some restrictions on what you can eat and you set some goals on exercise. It works for a week or two, then you have a coffee and a piece of cake. You tell yourself it's a one off and you'll exercise a bit more that week. 2 months later and you're eating cake with every coffee and your year long gym membership has already been unused for 4 weeks.

People will do whatever it takes to avoid the pain. Including lying to themselves and everyone around them.

Japan, here we come.

Wed, 01/14/2015 - 06:26 | 5659131 Ghordius
Ghordius's picture

no offense, css1971, but you are saying the exact same as Dr. Krugman. Japan? did it take the pain? no, I agree with you. evidence: their budgets deficits and their monetization therof

but a cursory glance at ZH in all european affairs, particularly financial, speak a loud voice of immense pain taken. so either this pain is not real, not purposeful or misguided or this "WeightWatcher's club" is "functioning as designed". which, btw, was never federalization or EuroBonds or any other Wall Street and City dreams or demands

Wed, 01/14/2015 - 06:32 | 5659135 css1971
css1971's picture

 

no offense, css1971, but you are saying the exact same as Dr. Krugman.

Yes, I'm aware of that. I didn't say I agree with it though as any form of solution.

this "WeightWatcher's club" is "functioning as designed".

"was"

Wed, 01/14/2015 - 06:39 | 5659142 Ghordius
Ghordius's picture

a solution sounds like "fixing the thing". like re-solution. a final affair. that's not a continental goal. how about... maintaining?

"was" because of OMT? wait until the NCBs come online, and make OMT irrelevant

Wed, 01/14/2015 - 06:50 | 5659156 css1971
css1971's picture

 

that's not a continental goal. how about... maintaining?

the status quo. I understand that. Kicking the can. Sounds good except that maintenance is maintenance of a fundamentally unstable exponential system. Maintenance requires more, every year.

wait until the NCBs come online, and make OMT irrelevant

They could only do that by making the ECB irrelevant... I have to wonder how Germany would take that.

Wed, 01/14/2015 - 07:05 | 5659176 Ghordius
Ghordius's picture

the system as such is only unstable if you have budget deficits and monetize them. in short, if you treat your currency like you would if it was gold-backed... the system will behave as it was gold-backed

this view has an historical fundation, mind you

Wed, 01/14/2015 - 08:31 | 5659297 css1971
css1971's picture

I would define unstable more in engineering terms rather than financial. The default behavior of our banking/financial system is to fail catastrophically, requiring constant manual intervention to remain functional.

Wed, 01/14/2015 - 08:50 | 5659328 Ghordius
Ghordius's picture

doesn't that depend from the exponentiality of the thing? which is fed by increasing deficits and a propensity to never let anything fail, and so default? imho, yes

Wed, 01/14/2015 - 07:48 | 5659227 Smegley Wanxalot
Smegley Wanxalot's picture

Eating a whole cake while on a diet is fine as long as you wash it down with Diet Coke.  It's the diet chemicals in the drink that make ya skinny!

Wed, 01/14/2015 - 05:39 | 5659102 Ghordius
Ghordius's picture

You will never understand what the ECB is about if you don't forget that it's a confederation of national banks that strives for keeping options open

OMT? A legal zombie? No problem, this can be solved in a different way. OMT was anyway a stick, a threat. It worked, it did it's job without having to spend ammunition

now comes the fun. The primary turrets with the big guns can be put to rest, the secondary weaponry can be brought online: the NCBs themselves

Wed, 01/14/2015 - 05:47 | 5659109 GCT
GCT's picture

Ghordius I thought the American legal system put out some mumbo jombo but this tops ours!  So I guess the politicians along with the ECB will not come up with some conditions and the german courts will once again spend time with an opinion only to pass it off to this court.  That ruling was so non committal and appears to be nothing more then a samantics game.

Wed, 01/14/2015 - 06:29 | 5659118 Ghordius
Ghordius's picture

the German court clearly understands the goal, particularly the "keep the options open" part. and so it passes that ball like a football* champ

it's not that the legal situation isn't clear. it's just that the court has not ruled about it, yet (yeah, I know, I know)

immense speculation of the kind that increases volatility just to milk the market is like pornography: difficult to define, but you somehow "know it when you see it"

as a reminder, a every market has good, positive speculators. those buy when it's low and sell when it's high. net result: lower volatility and purposeful use of liquidity

but if there is an excess of speculators, or an excess of their ammunition or seriously big speculators, the game changes, and they might start to "shake" the market

net result: higher volatility and deleterious use of liquidity

markets, too, are facilities. they are not for the enrichment of a few insiders, they serve a purpose for the non-insiders. I know, a very oldfashioned view, but there it is, we continental europeans still look at markets and banking this way. OMT was just a threat: "try to shake and milk the markets, and we'll rip you a new one. signed: the CBs"

Wed, 01/14/2015 - 07:34 | 5659209 Oldwood
Oldwood's picture

An economy that attempts to sustain itself, not from production, but from speculation is doomed. The skimmers, the middlemen costs, can be absorbed as long as they remain a relatively small part of the costs of production and at least can simulate some beneficial aspects. We have long passed that level and it has become obvious that there is a rush to speculation as the PRIMARY source of income, and its obviousness is not wasted on the public at large. This will end badly, and especially ugly for those sucking the tit until it is swollen and quite sore.

Wed, 01/14/2015 - 06:00 | 5659113 css1971
css1971's picture

Link to the ruling: http://curia.europa.eu/jcms/upload/docs/application/pdf/2015-01/cp150002...

Some pertinent quotes:

"it does require that, when the ECB intervenes on that market, it does so with sufficient safeguards to ensure that its intervention does not infringe the prohibition of monetary financing"

Sorry. What? Buying bonds by definition is to support their price. Which by definition allows the issuer to sell into the primary market at a higher price/ lower interest rate. It is clearly monetary financing.

"the ECB will proceed with particular caution when intervening on the secondary market, in order to prevent speculati ve behaviour that would severely undermine the efficacy of the OMT programme."

Right. So no front running... Because that would never happen.

Finally, the Advocate General observes that, in order to comply with the prohibition of monetary financing, the OMT programme will, in the e vent of its being activated, have to be implemented in such a way that a market price can form in respect of the government bonds concerned, so that there continues to be a real difference between a purchase of bonds on the primary market and a purchase on the secondary market (given that a purchase on the secondary market made seconds after the issue of the bonds on the primary market could completely blur the distinction between the two markets).

LOL and WTF? This is just precious. What you going to do? Mark them down as "used", "previously enjoyed"? Prevent people from selling them after purchasing from a government? What?

Pedro Cruz Villanon: http://curia.europa.eu/jcms/jcms/Jo2_7026/

Or put another way. They're going to "print till their eyes bleed". 400% debt to GDP here we come! Stocks to THE MOON!

 

Wed, 01/14/2015 - 06:04 | 5659117 Haus-Targaryen
Haus-Targaryen's picture

This goes back to me "it will say everything and nothing except ..." 

The ECJ and its AG cannot say anything concrete, because, as soon as they do, the evil speculators (e.g., people with half a brain and buy and sell bonds) have a line in the sand they can push the market upto.  

Google defines doublespeak as;

"deliberately euphemistic, ambiguous, or obscure language." 

If this isn't doublespeak -- I have no idea what is.  

Wed, 01/14/2015 - 06:19 | 5659126 Ghordius
Ghordius's picture

"They're going to "print till their eyes bleed". 400% debt to GDP here we come! Stocks to THE MOON! "

sounds great. it nearly makes me forget that up to now, the ECB has not monetized, only lent against collateral... and this credit is coming back (one trillion in the last two years)

further, the budgets are being balanced so much that the Squid complains that the half-trillion QE it wants would be five times more the net issuance

and last but not least, the typical holder of european stocks in europe hasn't the leverage typical in the US and hasn't the political leverage on european politics in the way the US megabanks have in the US. and this you can see in how lower the european stock markets can go without anybody here making such a fuss

really, it's so damn all about the US Stock market that it's embarassing

Wed, 01/14/2015 - 06:56 | 5659165 sidiji
sidiji's picture

So you think eurostoxx are cheap in this environment? 

Wed, 01/14/2015 - 07:10 | 5659183 Ghordius
Ghordius's picture

my goodness, I would never make statements like that. I myself have some, without any leverage. but they could go way further down. in fact, I see my statement as that they are very likely to do so

my whole financial portfolio is only a hedge to my real business, so it's really not in any way an example to anybody if not in the same position as mine

Wed, 01/14/2015 - 07:23 | 5659194 piratepiet
piratepiet's picture

You mean you are hedged against the euro collapsing ?

Wed, 01/14/2015 - 07:41 | 5659205 Ghordius
Ghordius's picture

not on purpose, and I still question what this "euro collapsing" would mean. take the existing debt. would you take it over to a new national currency? depends, doesn't it? leaving it in EUR would be... easier, or less hassle and discussions with the creditors. this "euro collapsing" meme is old, tired and never-ending. any member has to see a clear advantage, in leaving

think it through. you have to be a Prime Minister and convince Parliament, first. and you have to show a clear advantage, and no, you can't gloss over the national debt

so you either have taxation in the new currency and debt in the old, or both in the new one. or even a mixture of both

and even if you go fully back to the new (actually old) currency, you might do some of your refinancing in EUR, later

and your economy? all the companies and individuals that use the EUR? they might want to stick to it, because of the integration of the markets and supply lines

Wed, 01/14/2015 - 07:46 | 5659224 piratepiet
piratepiet's picture

I was a half joke, Ghordius.  I would find that ironic.

Btw, I read one of your previous replies again and find it incredible you suggest the EUR/USD exchange rate could be the same if every country in the EU performed like Germany economically.  I remember you also maintain there seems to be no relation between exchange rates and budget and trade deficits.  That is also hard to take seriously.  Why you use the word "seems" ?  Yes, obviously one is not a simple function of the other, but all these elements affect the exchange rate I think.  As do military and security capabilities that back it all up. ( where France contributes more than Germany ).  

 

Wed, 01/14/2015 - 07:54 | 5659242 Ghordius
Ghordius's picture

I do half jokes, too. the EURUSD has practically no connection to fundamentals, imho. not trade, not budgets, nothing

leverage is king. in particular, de-leveraging increases the demand for currency. that's a  longstandingZH theory, btw, and it took me huge amounts of time to swallow that bitter pill

so I maintain that the real danger is to neglect fundamentals, particularly in the long run. which is easier for the dollarzone then for the eurozone. clear enough?

Wed, 01/14/2015 - 08:04 | 5659253 piratepiet
piratepiet's picture

"de-leveraging increases the demand for currency. that's a  longstandingZH theory"

That is not clear to me, will try look it up. 

Thx

Wed, 01/14/2015 - 07:43 | 5659212 Oldwood
Oldwood's picture

"lent against collateral"

You mean like Greek bonds?

Cypriot bonds?

Collateral is irrelevant as the bonds will never be allowed to default and claim their supposed collateral as the collateral is either being secreted away to some place it can't be touched (Goldman isn't paid for nothing) or the claims on it would only prove its worthlessness.

We all know that ALL sovereign debt will never be paid back. It is simply another casino chip for the speculators to play on. When it craps, it will crap on all of us, not the speculators.

Wed, 01/14/2015 - 07:44 | 5659222 Ghordius
Ghordius's picture

if memory is not betraying me too much, they had to be of "high quality", so no. as far as I understood, often they were... USTs

hilarious, isn't it? King Dollar rules

Wed, 01/14/2015 - 08:30 | 5659295 Oldwood
Oldwood's picture

If my memory serves, the EU debt was pledged by all countries including Greece and Cyprus and Spain and Italy and Portugal. Lots of bankrupt countries pledging to repay the loans that are being used...to repay their loans. If that's not monetizing, what is? The new definition of default does not seem to include borrowing money to repay money already borrowed while showing zero willingness or ability to repay. Its all shit, we know its all shit and that is what is insulting about it. These fucks are lining their pockets to the tune of millions if not billions while those fools who actually are trying toe EARN a living are sliding backwards down the tube to hell...and they are doing it in our face. None of us could survive six months with a monetary policy like theirs, while they are getting richer, while telling us they are doing for us, the little people. Every one of these people should be put in stocks in the public square and every speculating gambler trying to profit from this shit should be wiped clean and set out to live on the street.

Wed, 01/14/2015 - 08:00 | 5659249 Ghordius
Ghordius's picture

there is no need for sovereign debt to be paid back. in fact, a small, healthy dose of debt is good for you... if you are a sovereign

remember that sovereign debt is mainly war debt. a healthy, interesting market of that stuff is a weapon, an increase of options. si vis pacem para bellum

Wed, 01/14/2015 - 08:40 | 5659304 Oldwood
Oldwood's picture

Yes, and fucking a fellow business person is OK because its just business, right? It is amazing how we can justify our immorality by telling ourselves its for the good of the economy when we know its about the good for ME. The only way debt is sustainable is through inflation and inflation DOES stimulate an economy just like cocain stmulates the brain, but for how long? It is a game that is designed to only benefit one group and that group is comprised of the financial elites. The only system that benefits the working person is stability, the thing the Fed was supposed to create but instead harvested for the benefit of the bankers and of course the complicit politicians who make the whole thing possible.

How many have sold their soul tothe devil of debt? And who is the devil?

Wed, 01/14/2015 - 08:54 | 5659334 Ghordius
Ghordius's picture

"fucking a fellow business person is OK because its just business, right? " I would say not at all. Never done, myself. From my perspective, this "cut-throat" competition thing is a madness theory too many people picked up as gospel, like the "greed is good" mantra of Wall Street

Wed, 01/14/2015 - 10:38 | 5659726 Oldwood
Oldwood's picture

And this is why we created rules, an attempt to create a relatively level and unbiased ground of competition. Cut-throat competition cannot last...it does not last as with any system that ignores long term consequences for short term gains. What we have now is a system that admits it is corrupt but excuses it as the only path to save us, when in reality they are forcing us to pay them to save us from them and their corrupt policies that allow open theft. Their ends are justifying their means...whatever it takes, right?

Inflation. A system that forces us to enter THEIR casino as the only means of protecting our savings, the property that we exchanged our lives for. There was a time when you could bury your saving in a can and dig it up twenty years later and it would still be worth pretty much what you invested into it. Now that is not true. Now we must go to a bank and loan it to them hoping we can maybe almost keep up with inflation. Or better still we invest in a mutual fund, the glory hole of thieves around the world creating slush funds for minimal returns with high fees and zero security. Investment strategies that can be more successfully mimicked by monkeys. This is the scam of two centuries and we all fucking know it. Growth...Bullshit! Growth for whom?

Wed, 01/14/2015 - 06:06 | 5659114 GittyUP
GittyUP's picture

I think you missed the most contradicting part. On one hand the ruling allows the ECB to "lower borrowing costs" to allow it to operate In a stable environment but on the other hand the purchases are not allowed distort market prices on bonds. Wtf?

So explain to me how the ECB can "lower market yields" without "distorting market yields". Lol

Wed, 01/14/2015 - 06:34 | 5659140 Ghordius
Ghordius's picture

explain to me... how much does the FED distort the financial markets of the whole world? I remember when the eurozone had one percent more yield then the US, and every grandmother in America had a financial adviser telling her to open a CD / money market account where the managers took all those USD "equivalents" and bought immense amounts of european sovereign debt

without having a clue where the difference between Ireland and Greece and Germany is, since it's "all the European Union, isn't it? they have a FED-like thing, they'll bail out everything if needed"

the mighty FED set ZIRP. whatever the FED does, the whole world is effected. the FED pumps, stock markets in Turkey et al go ballistic. the FED drains, they crash

Wed, 01/14/2015 - 07:07 | 5659177 desirdavenir
desirdavenir's picture

well, in the end, they were right to not discriminate between Greece and Germany, as in spite of the legal contents, every possible side-stepping from legality was taken to ensure that EU sovereign creditors are commonly responsible for the debt of each member. Blatant violation, imho.

Wed, 01/14/2015 - 09:04 | 5659350 chubbar
chubbar's picture

It will be interesting to see what the response from Germany entails? Here we have a "trade alliance" whose governing body is ignoring/twisting/breaking the law against the better judgment/law of Germany, one of the key EU players. Does Germany fold because they were not really committed to upholding this law but merely trying to maintain the facade of fiscal responsibility OR do they take the position that there is no room for misinterpretation of the laws as they exist and leave the EU? I don't see any other recourse if the German court and EU court are in 180 disagreement.

This decision is exactly the fig leaf the Germans could grasp onto if their intentions trend towards the latter of the 2.

Wed, 01/14/2015 - 06:04 | 5659115 Sivad UK
Sivad UK's picture

DP

 

Wed, 01/14/2015 - 06:02 | 5659116 Sivad UK
Sivad UK's picture

My favourite quote from AG's personal statement:

"... the ECB should have broad discretion in framing and implementing the Eurozone’s monetary policy, and (the) legal courts therefore must exercise a considerable degree of caution when reviewing the ECB’s activity, since they lack the expertise and experience which the ECB has in this area."
You can just imagine the briefings on the matter over the past few months - every time the AG asks an uncomfortable question some guy in a white lab coat with an ECB/CERN logo on it tells him not to worry about the details. "It's just so complicated. Only we understand the details. You just let us and off duty janitors we have on loan from CERN worry about the details."

"Te?"

 

TBTF? Nah... Now they are just Too Smart To Regulate... TSTR....

And what happens to all of Cruz Villalon's real estate investments if he opines the wrong way? How do you have a judge hailing from the PIGGS rulling on this anyway???

Madness... 

Wed, 01/14/2015 - 06:06 | 5659119 economists_do_i...
economists_do_it_with_models's picture

The emperor has no clothes.

Wed, 01/14/2015 - 06:32 | 5659136 sidiji
sidiji's picture

didnt ZH say the courts wouldnt let draghi do QE just a few days ago?  come on Tyler, we're getting tired of your constant negativity...your penchant for spinning the news to justify your short positions in the market is clouding your judgement and resulting in both bad reporting and poor guessing

Wed, 01/14/2015 - 06:46 | 5659152 Ghordius
Ghordius's picture

I think you have a misunderstanding, there. ZH brings all bad news. and neglects all "good news"

further, it has a certain "market fundamentalist" approach. which is an apt point of view to be indeed very critical of how this OMT thing is being handled

in fact, the only thing that ZH's Tyler miss to highlight is the somewhat Austrian School approach of the eurozone. probably because they don't believe it, or they don't like sovereigns adopting such views, or because it would be "good news", which is my preferred explanation

Wed, 01/14/2015 - 09:19 | 5659376 chubbar
chubbar's picture

I don't pretend to be an expert on these issues but from what little I know, adopting the "Austrian School" approach to running an economy AFTER one has allowed the finanical elite to lever up, loan massive amounts into the economy thus imparting massive malinvestment throughout the economy while reaping hugh windfall gains from the securitization racket and insider trading/HFT schemes, doesn't work for what should be obvious reasons. They can't allow the debt to "clear" without "apparently" triggering a cascading derivatives meltdown AND (most importantly) having bank failures and wealth destruction of the Elites.

But, what this "Austrian School" approach CAN DO is allow the elites and gov't to remain in existence at the sacrifice of the middle classes and poor people outside the financial sector. I, for one, do not believe that 1). Brussels gives 2 shits about the masses of disaffected citizens of EU (up to the point that they are scared for their physical being) and 2). That this program, should it continue, will ever be able to reset balance throughout the monetary system/economy of the EU. The system has been raped and pillaged by the elite and the malinvestment is too great. They can only delay and to do so comes at the expense of the people paying for it, which are not the elites.

Wed, 01/14/2015 - 07:02 | 5659171 desirdavenir
desirdavenir's picture

So the ECJ says that if the BCE members say that a country will not default, we must believe them. If it does default, there was a mistake in the priori assessment, but we must still believe that they are right. Even if being wrong would mean a violation of the instituting treaty. To sum up even further, the ECJ eventually says that Maastricht treaty semantics is defined by bureaucrats at the ECB, and not by MPs nor any elected body. while it's true that there is a margin of appreciation left re- technical details, I don't think was intended to be this large. Or why would these articles exist otherwise ?

 

Wed, 01/14/2015 - 07:09 | 5659181 Brazen Heist
Brazen Heist's picture

They are laying the ground work for QE. With Greek elections coming up, QE is the perfect cover. Absorb those bad balance sheets on German and French banks when Greece defaults, QE to the rescue.

Wed, 01/14/2015 - 07:22 | 5659201 RealityCheque
RealityCheque's picture

Add Ireland, Spain, Portugal and ITALY to that basket. All is lost and they know it.

Wed, 01/14/2015 - 07:21 | 5659198 RealityCheque
RealityCheque's picture

The conditions are unconditional. Down is up. Hamburgers eat people.

Are we all clear now!?

Wed, 01/14/2015 - 07:43 | 5659217 vyeung
vyeung's picture

The criminals in the EU should just do it so Germany, Netherlands etc can leave the frigging useless EU. The EU is now a completely failed state. Prince Draghi is go for greener pasture (Italian President). This to and fro is getting both boring and stupid. Let the EU Bureaucrats nuke themselves.

Wed, 01/14/2015 - 07:49 | 5659228 Ghordius
Ghordius's picture

how can the EU be a "failed state" if it isn't a state? define state to me, and see if it "sticks" to the EU. until then, it's a trade alliance of sovereigns with a common regulatory framework

Wed, 01/14/2015 - 09:24 | 5659383 chubbar
chubbar's picture

I don't want to speak for the guy but perhaps he meant. "The EU is a completely failed trade alliance of sovereigns with a common regulatory framework"?

Wed, 01/14/2015 - 08:22 | 5659280 SpanishGoop
SpanishGoop's picture

"Prince Draghi is go for greener pasture (Italian President)."

I can think of a lot more greener pastures.

The pasture of Italy looks more like a dessert.

 

Wed, 01/14/2015 - 12:00 | 5660127 JR
JR's picture

Exactly. Do not expect economic justice from the international monetary system, “a powerful tool for the select few” incorporating the likes of the G20’s Financial Stability Board, the IMF, BIS, the WTO, the EU,  et cetera. Control of central banking by Goldman Sachs’ operatives the likes of  Draghi and Fischer is a lucrative business, for the insiders.

“The 'one percenters,' generally speaking, are internationalists who are not champions of individual liberty and free trade. They are supporters of managed trade and international institutions like the WTO where the interests of the one percent can influence the rulings that frequently have little to do with advancing advertised goals of low tariffs and free trade.” – Ron Paul

And where the people, always, are forced to pick up the tab.

Wed, 01/14/2015 - 07:59 | 5659247 LostandFound
LostandFound's picture

Im sorry, but i dont understand, can someone explain easily to me what this means, i am a dumbshit :(

Wed, 01/14/2015 - 08:15 | 5659266 Ghordius
Ghordius's picture

we all are, in selected fields. basically, when Draghi said "whatever it takes", he set up OMT, aka "the bazooka". in short, his willingness to buy bonds if necessary

OMT was not used, and the German court has not judged if it's constitutional, for Germany. in short, nothing happened, so far

Wed, 01/14/2015 - 09:00 | 5659341 LostandFound
LostandFound's picture

Thanks Ghord

Wed, 01/14/2015 - 08:55 | 5659335 rsnoble
rsnoble's picture

Extend and pretend all the way to the grave.

One day you'll turn on CNBC and the headline will read "economy collapsed overnight".

Wed, 01/14/2015 - 09:55 | 5659494 Toolshed
Toolshed's picture

" the Advocate General Pedro Cruz Villalon of the EU Court of Justice in Luxembourg delivered the non-binding.........."

Non-binding? So.......just theatre for the muppets?

Wed, 01/14/2015 - 10:24 | 5659605 Youri Carma
Youri Carma's picture

I am not sure I completely understand it but this is what I understand from this article:

It’s like a street of houses on fire (each house representing one EU nation country) and the fireman can only engage in fighting this fire when they are sure that the house will not collapse after they have engaged in their fire fighting.

To know this they have to apply certain technical conditions in order to know if they have to engage in fire fighting or not. If it’s sure the house will collapse anyways they are not allowed to engage in it. Understanding that they never can be an 100% sure.

They NEVER are allowed to rebuild (fund bailouts) the house after the fire.

So if, for example, it's clear that Greek will collapse they are not allowed to buy up Greek bonds while that is exactly what the Greek asked for. This will be a clear signal for the hyena hedge funds to attack Greece and make sure it will default.

Wed, 01/14/2015 - 12:20 | 5660210 tommylicious
tommylicious's picture

Zey are in....how you say?......sheeet.

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