Germany's Constitutional Court Wednesday gave its approval for the implementation of a bailout fund in the euro zone while outlining certain conditions, including Germany's total exposure to the funds.
The Federal Constitutional Court in Karlsruhe gave legal status to the European Stability Mechanism (ESM) bailout fund and the European fiscal treaty, which will help reduce the debt burden faced by the countries in the region.
It was important that Germany, which contributes 27 percent to the 500 billion euro ($625 billion) rescue fund, ratified the ESM. The court placed a 190-billion euro cap on German liabilities until the Bundestag agrees to provide additional guarantees.
On Tuesday, the court rejected a plea to delay the decision. The plea, moved by Peter Gauweiler, MP, of the Christian Social Union (CSU), which is the sister party of the Christian Democratic Union (CDU), had urged the court to delay the decision in the wake of the European Central Bank's announcement of the new bond-buying program.
At the ECB meeting in Frankfurt last week, President Mario Draghi unveiled the new bond-buying plan called the Outright Monetary Transactions (OMT) program. Bonds in the countries implementing the approved fiscal austerity measures and maturing within three years will be focused in the OMT. Investors feel that such bold measures will provide a much-needed thrust to boost liquidity in the euro zone financial system.
The purpose of the program is to cut the borrowing costs and improve the transmission of the monetary policy. So far, the plan is having a positive impact in keeping Spain and Italy's borrowing costs low. Last week, Spanish 10-year yields witnessed a 100 basis point drop.
The ECB has also promised to buy the bonds of any country that asks the European Financial Stability Facility (EFSF) or ESM for support, potentially significantly boosting the combined firepower.
However, investors still have concerns that the OMT can turn out to be more of a time-buying exercise with the deep-seated economic and fiscal problems faced by Spain and Italy yet to be fully tackled. Market players sense that the OMT will have to be followed by major policy measures to reinstate financial and economic stability in Spain and Italy.
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