One of the big obstacles holding back a decision QE could be made much clearer on Wednesday.
The legalities of sovereign bond buying in Europe could have some clarity tomorrow as the European Court of Justice gives its opinion on the merits of the ECB’s OMT program. The program was touted back in 2012 and came as part of Mario Draghi’s “do whatever it takes” plan to save the future of the Eurozone.
Although the program has never been used it faced a legal battle with Germany referring it to their constitutional court. They decided it was too big for their boots and so referred it on to the highest court in the Europe.
The first hearing is set for tomorrow and while there will be no binding ruling made the court will be giving it’s opinion of the case and the market will be looking closely for anything that either potentially clears or blocks the ECB from embarking on QE.
It’s a big risk event for the markets even though a final ruling is many months away. It’s also likely that the details will need to be scrutinized as obviously the OMT is a whole different program to QE and what may be legal/illegal in one may not mean the same for the other. Also whatever the slant of the news tomorrow it doesn’t explicitly mean that the final ruling will go that way.
We’ll also need to be careful of any market reaction to negative headlines that the market views as making QE difficult legally. While the natural reaction would be to see the euro bounce on the possibility of no QE, we’d then be faced with the prospect of the ECB losing their biggest tool to try to fix the economy, and that might be an even greater negative for the euro.
The “opinion” is scheduled to come out around 9.30 am local time tomorrow (08.30 gmt) and the final ruling could be anytime between 4-6 months away, but we could get a better idea of timeframe along with the news.
The fate of Draghi’s QE program rests in the hands of court advocate Pedro Cruz Villalon tomorrow
Here’s a couple of articles we’ve had previously on QE and the court announcement
What are the broader risks if the ECB doesn’t do sovereign QE?
