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MNI SOURCES: ECB Concern Over Ruling; Ex BoI's Honohan Upbeat

--Ex Central Bank Of Ireland Chief Sees No ECB Problems From German Ruling
--ECB, EU Sources Less Sanguine, Say Could Affect Policy
By Luke Heighton
     FRANKFURT(MNI) - The ECB should have no difficulty in meeting a call from
Germany's Constitutional Court to justify its bond purchases and may even use
the ruling to see off future legal challenges, the former governor of Ireland's
central bank told MNI, but other officials expressed concern about a potential
impact on the EUR750 billion pandemic emergency programme
     "They will find it quite alright that they should be invited to explain and
justify themselves. They might think that they have done so already," said
Patrick Honohan, after the eight-member Bundesverfassungsgericht gave the
European Central Bank three months to demonstrate that its public sector
purchase programme was proportionate to its "economic and fiscal policy
     The ruling may even work in the ECB's favour if it opens the door to court
cases which target its Pandemic Emergency Purchasing Programme, said Honohan,
who led the Central Bank of Ireland from 2009-15.
     "This judgement opens a window to the ECB for dealing with any challenges
to the PEPP by providing a full economic justification. It's a roadmap for
moving forward, and much better than it might have been. It forestalls any other
unwarranted challenges or interruptions. They are doing it to meet their
mandate, so they have the justification."
     Eurosystem and European Union officials who spoke to MNI were in the main
less sanguine.
     "Even if the ruling does not directly involve PEPP," another Eurosystem
official said, "it could lead the ECB to revise or reword its next policy steps
in the near future."
     "It's a severe blow at a very negative moment, which could have serious
implications if the ECB fails to provide adequate legal justification," the
official said, though emphasising that the worst case scenario of the
Bundesbank's pulling out of quantitative easing, or even of other central banks'
following suit, was unlikely.
     If this should happen, other national central banks could step in to
compensate, the official said.
     "Proportionality criteria of issuer limits, capital key are based on legal
aspects, but the ECB can go beyond such terms if necessary, and would still be
operating within its mandate without overstepping it as long as the goal, and
therefore justification of QE or the like, is to guarantee the transmission of
monetary policy."
     Another official agreed.
     "Other central banks could substitute for the Bundesbank, and the ECB as
such also could substitute. From my evaluation of the reactions of
representatives of the Bundesbank they were not so very happy with a negative or
more restrictive decision of the Bundesverfassungsgericht," the official said,
saying that the German central bank's attitude to ECB policy had changed.
     "The Bundesbank, if I compare the president's position now with the
position in the past I can see a big revolution. Of course now they have to
analyse the new decision - we all have to - but still I think we're facing an
era of more flexibility than we could have imagined two or three years ago."
     An EU official, however, said that a work-around based on substitute bond
buying by other central banks might just cause more trouble.
     "It doesn't help, because the money could flow to Germany through Target2
and create claims from Bundesbank on ECB," the EU official said, "Germans will
not be happy with that either."
     "There was no risk sharing provision in PSPP, plus even if another NCB
would do that," the official said, warning also that the German court might not
wait long before considering the legality of the PEPP itself, the official said.
     Another eurosystem official called the ruling "an insult to the European
Court of Justice," saying it appeared to contradict the ECJ's view that PSPP is
     But Honohan saw no impact on bond purchases, noting that Bundesbank
President Jens Weidmann had agreed in 2015 that PSPP was legal, in contrast to
2010, when the Bundesbank differed with the ECB over the legality of its
outright monetary transactions programme.
     "The ECB will have no difficulty in spending the next three months
developing the justification for and the proportionality of what it's doing,"
Honohan told MNI.
     Spokespeople for the ECB and the Bundesbank declined to comment for this
     --Additional reporting by MNI Reporters
--MNI London Bureau; +44 203 865 3829; email:
[TOPICS: M$X$$$,MT$$$$,MX$$$$,M$$EC$]

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