Published on 6 May 2020

I can’t help regarding this decision of the Bundesverfassungsgericht (BVG) as a bit of a fudge. It is rendered less biting because (i) this is part of a long-running saga bouncing between the European Court of Justice (ECJ) and the BVG; (ii) the case is being pursued by people whom the courts can characterise as extremists; and (iii) the BVG has no jurisdiction over the central banks that hold the assets the plaintiffs are most worried about.

The Quantitative Easing (QE) portfolios they are worried about – bonds of Italy and Spain – are owned by those countries’ National Central Banks (NCBs), not by the Bundesbank, over which the BVG has some jurisdiction. The QE structure is that the bonds are bought by the NCB of the bond’s issuer, so Italian bonds are bought by the Banca d’Italia.

If the plaintiffs want to get the BVG to bind the Bundesbank and have some real impact, they would need to prove that the Bundesbank was enabling the QE via the intra-NCB loans occurring through the TARGET2 payment system. Some commentators and academics have focused on the EUR1 trn of imbalances that the ECB shows in its monthly reports. This is only the net balance that is left over by the daily netting. The figures before netting will be higher, and could be the EUR2-3 trn that furnish the Italian and Spanish NCBs with the funds needed to buy the QE portfolio.

The plaintiffs would be much better off, in my view, if they concentrated on the fact that the European System of Central Banks (the Eurosystem or the ESCB, a hydra consisting of the ECB and all of the NCBs) owns or controls 70%+ of Eurozone bond supply. “Owns” relates to the QE, whereas “controls” means “has accepted as collateral”, which is happening through loans to banks and through TARGET2.

The 70% can be understood as:

• 30% QE (which will also be the disguised amount in TARGET2 that is netted off)
• 30% loans to banks, shown as loans to euro-area resident Monetary Financial Institutions in the Eurosystem balance sheet
• 10% TARGET2 net balance as reported by the ECB

The total Eurosystem support to the Eurozone financial market is about EUR7 trn, compared to the Eurozone general government gross debt of EUR10 trn. This latter figure excludes private sector bonds, while including general government sector loans. Private sector bonds feature as eligible Eurosystem collateral though, and are eligible for investment in the QE programmes, although not the programme that is being challenged at the BVG. All this is explained in the book “Managing Euro Risk” that I co-authored with Barnabas Reynolds and David Blake, and which was published in February of this year by Politeia.

80-90% of the total Eurozone bond stock is eligible as Eurosystem collateral, a prerequisite for its being eligible for QE. 70% of the total Eurozone bond stock is owned or controlled by the Eurosystem, which equates to 78-88% of Eurosystem eligible collateral.

The Eurozone bond market is basically a monopsony – a market with only one buyer.

Conversely this would give the ECB their reason for not stopping QE, or rather for certainly not selling out the QE portfolio or winding down the loans to banks. If that one buyer becomes a seller, the market collapses and it is not in the interests of the maintenance of the euro for that to happen.

So expect this to go on and on without resolution.