Injunction Request Aims to Stop German Role in ECB's bond buying

By Tom Fairless Features Dow Jones Newswires

A Berlin-based law professor has filed a cease-and-desist request aimed at quickly ending Germany's involvement in bond purchases by the European Central Bank, a surprise legal move that underlines mounting German anger over the ECB's easy-money policies.

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The request for a legal injunction, sent to Germany's top court, shows the lengths to which some Germans are prepared to go to derail a EUR2.3 trillion ($2.57 trillion) stimulus program they accuse of subsidizing southern European governments and hurting German savers, pensioners and smaller companies.

The move reflects concerns that the German constitutional court won't rule on the legality of the ECB's bond-buying program until it is too late to stop it, said Markus Kerber, an attorney and professor of public finance at Berlin's Technical University, who filed the injunction. The ECB's recent moves to expand the program heighten the risks for the Bundesbank and the German government, Mr. Kerber said.

German courts can't stop the ECB's stimulus programs directly, but they can prevent the involvement of Germany's Bundesbank, which holds around a quarter of the ECB's share capital.

"We simply want the ECB to dispense from continuing to implement the program," Mr. Kerber said. "The risk to the Bundesbank is unbearable."

The constitutional court on Monday received a request for a temporary injunction against the ECB's bond-purchase program, a spokesman said. It isn't yet clear when the court might make a decision, he added.

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The move comes at a sensitive time for the world's second most powerful central bank, which is considering how quickly to wind down its EUR60 billion-a-month bond-buying program as the region's economy recovers. ECB officials are eager to avoid any abrupt move that could prompt a repeat of the so-called taper tantrum in the U.S., when bond yields surged after the Federal Reserve announced it would wind down its own bond purchases.

The lawsuit is the latest in a series of German legal attacks on the ECB's bond-purchase programs, which are viewed with deep suspicion by the nation's conservative central bank and political establishment. These cases haven't yet stopped the ECB, but Germany's top court has imposed constraints on the Bundesbank that helped to shape the ECB's most recent bond-purchase program, known as quantitative easing or QE.

The constitutional court last June ruled in the ECB's favor over a legal challenge to a separate ECB bond-buying program, known as Outright Monetary Transactions. But the court's ruling was nuanced, insisting that the scope of bond purchases must be limited and other conditions met.

That ruling was issued four years after the OMT program was announced. QE was announced almost 2 1/2 years ago.

Mr. Kerber said he is acting on behalf of several leading German entrepreneurs, including Reinhold von Eben-Worlée, president of Germany's association of family-owned businesses.

Germany's Mittelstand firms--midsize companies that often dominate niche global markets--worry that the ECB's purchases of corporate bonds under QE support the region's biggest companies but put smaller firms at a competitive disadvantage, Mr. Kerber said.

The lawsuit argues that a relatively small level of losses from the ECB's massive bond portfolio could harm the Bundesbank's ability to carry out its functions. That could force the German government to recapitalize the central bank, violating the constitutional principle that it should be the German people who decide how to spend public funds, it says.

"Each additional day that the program is carried out perpetuates the risks and so the damage potential for the Bundesbank and the [German] parliament's budgetary autonomy," the suit says.

In practice, central banks can function with negative capital and have done so effectively, for instance in the Czech Republic. But a large capital hole could undermine investor confidence in the central bank's ability to operate, thereby weakening its ability to hit its inflation target.

Mr. Kerber's lawsuit also argues that the ECB hasn't yet signaled when QE will end, even though inflation in the eurozone has risen to 1.9%, in line with the central bank's target of just below 2%.

Given the economic rebound in the currency bloc, most economists expect the ECB to start winding down QE next year. But top ECB officials have yet to send any signal to that effect.

Testifying in the European Parliament on Monday, ECB President Mario Draghi said it is too soon for the bank to change course. ECB officials will gather in Estonia next week to reconsider their policy mix.

"We share the ECB's view that the European economy is not yet at 'escape velocity' and that in the short term it still requires a loose monetary policy," said Vincent Juvyns, global market strategist with J.P. Morgan Asset Management in London.

Still, German pressure on the ECB continues to build. Speaking in Berlin on Monday evening, Bundesbank President Jens Weidmann--a longtime critic of the ECB's bond purchases--suggested it may soon be time to start winding down QE.

"It is completely legitimate to ask when the ECB Governing Council should consider a normalization of monetary policy," Mr. Weidmann said.

Anton Troianovski in Berlin contributed to this article.

Write to Tom Fairless at tom.fairless@wsj.com

(END) Dow Jones Newswires

May 30, 2017 05:04 ET (09:04 GMT)