May 5, 2020 / 9:35 AM / a month ago

Instant View: Bundesbank must stop buying government bonds unless ECB proves need - court

LONDON (Reuters) - Euro zone bond yields rose on Tuesday and the euro fell after a German consitutional court instructed the Bundesbank to stop participation in the ECB’s long-running PSPP stimulus scheme unless unless the ECB can prove those purchases are needed.

The ruling doesn’t apply to the ECB’s pandemic financing facility, the PEPP.

German 10-year yields rose 3 basis points, having earlier been up 1.12 bps while Italian yields rose 5 bps DE10YT=RR IT10YT=RR. The euro was down 0.6%. German shares however gave up knee-jerk losses to rise more than 1%

Here are some comments from market participants:

JEROME LEGRAS, HEAD OF RESEARCH AT AXIOM ALTERNATIVE INVESTMENTS “Never seen such a legal slap in the face in my entire life. Ultimately, I’m not sure there will be real consequences, the ECB will have to explain and detail much more. Importantly, they also said this does not apply to current COVID-19 program (PSPP)”.


“The important takeaway is that the ECB and Bundesbank has three months to rememedy the court’s concerns. What we don’t know is how they can address those worries.

“The least likely but most positive outcome for markets is if the ECB tries to convince the court on the importantance of the PSPP. The second outcome could depend on whether they can add some safegaurds to make sure PSPP honours the principle of proportionality between ecoonomic and monetary policy. This is the hardest one to assess.”


“At first glance, the ruling of the German court on un-constitutionality of QE could be perceived as a big blow to the ECB. It can be even seen as the beginning of the end of the euro. However, the devil is, as always, in the detail. The court is allowing the ECB three months to mend problems with QE. The decision ultimately relies on the Bundesbank being a willing participant in the program.

“At the moment, it looks like there is enough wiggle room for QE programs to continue, even if delayed somewhat. So, the knee-jerk reaction is likely to pressure euro, Italian bonds and possibly European banks; but the pressure is likely to be short-lived.”


“The court’s decision may bring into question the Bundesbank’s future participation in Europe-wide programmes. Given Germany’s economic size within both the EU and the Eurozone a failure for the Bundesbank to support future risk mutualisation would be a negative for European risk assets.

“This will put pressure not only on future quantitative easing participation but also deliver political pressure to not support fiscal burden sharing

“(The decision) highlights the lack of unity in Europe over the need or legal ability to provide support for weaker member states.”


“PSPP violates German law but I think the 3-month deadline is important to clarify proportionality and ECB can move on after that. In the meantime, PEPP carries on as normal.”


“This looks like a little big bang. Karlsruhe looks to heed to the complains partially. It attests to the European court of justice that it has exceeded its authority in parts.”

“If all of this leads the ECB to make its decisions and their proportionality more transparent, than the ECB can probably deal with it. But we have to examine all the details to understand the ramifications.

“In practice, this should not restrict the ECB too much. However, Karlsruhe has emphasized that there are limits to bond purchases. This could make it more difficult for the ECB to expand PEPP.”

Reporting by London markets team

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