Euro-Parliament, IMF defend ECB's bond-buying scheme

(KARLSRUHE) - Germany's highest court wrapped up its examination of the legality of the European Central Bank's key anti-crisis measure on Wednesday, with both the European Parliament and the International Monetary Fund riding to the ECB's defence.

"Unusual circumstances require unusual measures," IMF chief Christine Lagarde told the daily Sueddeutsche Zeitung in an interview, as the Constitutional Court held a second and final day of hearings in the highly complex case.

The announcement by ECB president Mario Draghi of the bank's OMT bond purchase programme marked the "turning point" in the eurozone's long-running crisis, Lagarde said.

"The ECB's decision to charge to the rescue changed everything. The OMT averted a catastrophe," she said.

Germany's Constitutional Court has been asked to decide whether the ECB's "Outright Monetary Transactions" scheme -- credited with bringing the eurozone back from the brink of break-up last year -- is in line with German law or whether it breaches the central bank's mandate.

Ever since the ECB unveiled the scheme to buy up the sovereign debt of the euro area's most debt-wracked members last August, fears of a break-up of the single currency have indeed receded.

Europe's storm-battered financial markets have enjoyed a period of relative calm, without a single OMT ever being carried out.

Among the expert witnesses heard over two days were the head of the German central bank, or Bundesbank, Jens Weidmann, one of the most vocal critics of the scheme.

The ECB's case for the OMT programme was put by executive board member Joerg Asmussen.

-- It's a matter of ECB independence --

The plaintiffs are a group of politicians, lawyers and citizens who believe that the ECB is creating risks for German taxpayers that their elected representatives cannot control.

Arguing the ECB's case for the second day, Asmussen said that the "decisive matter is that it is the market players who shoulder the economic risk.

"The market participants don't know whether or when we'll step in to buy up bonds. And if we do, we'll ask for bids and see what the market price is and we don't buy above the market price," Asmussen said.

He again insisted that the aim of the programme "is not to avert the insolvency of a eurozone member. That lies outside our mandate."

But the head of the Munich-based think-tank Ifo, Hans-Werner Sinn, speaking as an expert witness for the OMT's critics, strongly believes that the ECB is moving beyond its legal remit and by-passing the normal functioning of the market with the programme.

The wide spread in interest rates between the eurozone's stable core countries such as Germany and debt-wracked countries such as Spain, Portugal, Greece and Italy, "are not an indication of a dysfunctioning of the markets, but rather the rational reactions of the markets to the almost insoluble debt problems of individual euro countries," the expert argued.

Another who came to the ECB's defence was EU Parliament president Martin Schulz, who argued that by unveiling the bond-purchase plans, the ECB had helped bring down the borrowing costs for the countries most at risk.

"They finally found themselves in the position of being able to finance their debts again. That means the risks (for German taxpayers) were actually reduced," Schulz told German public radio Deutschlandfunk.

Schulz said the key issue in the whole debate was how independent the ECB should be in its decision-making.

The Bundesbank and its president would be the first to protest if the German parliament tried to interfere in its independent decision-making process, the parliamentary chief pointed out.

When it finally makes its judgement, the constitutional court "may give directives, laying down the limits to which such measures can go. But I don't believe the court will rule that the ECB's actions are illegal," Schulz said.

"In contrast to many government chiefs, I believe that what (ECB chief Mario Draghi) did was coherent. And he came to the strong defence of the euro," Schulz said.

The Constitutional Court is not expected to reach a judgement before Germany's general elections on September 22.

Similar complaints against the eurozone's EFSF and ESM bailout funds were thrown out by the court last year.