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5 Key Takeaways From The ECJ's Kinda Sorta 'Thumbs Up' To Draghi

Via Dow Jones,

An adviser to the Luxembourg-based European Court of Justice (ECJ) has delivered a tentative thumbs-up to an ECB bond plan unveiled in September 2012 that was aimed at countering euro break-up fears.

The nonbinding ruling has garnered a lot of attention in financial markets, even though the program under review, called Outright Monetary Transactions, hasn't been used. Its mere presence was enough to convince investors that the euro was here to stay, and sparked a lasting rally in Spanish and Italian bond markets.

Still, Wednesday's ruling had implications for a separate government bond purchase plan that the ECB is widely expected to announce at its Jan. 22 meeting. That program, known as quantitative easing, would be aimed at raising the money supply and lifting inflation toward the ECB's 2% target. Unlike OMT, it would certainly be used.

With consumer prices down on an annual basis in December for the first time in over five years, financial markets consider QE to be a given, and the court's decision appears to give the ECB wide leeway in designing a program.

Here are five takeaways from the court's findings.

#1: OMT is legitimate

A lawsuit brought by German lawmakers and academics argued that the OMT was outside of the ECB's remit and amounted to central bank financing of governments. The ECJ's advocate general said: "The ECB must have a broad discretion when framing and implementing the EU's monetary policy, and the courts must exercise a considerable degree of caution when reviewing the ECBs activity."

#2: But there are Caveats

The ruling isn't a total green light. Safeguards are needed to ensure that the program doesn't violate ECB rules against financing governments. The opinion also suggests that the ECB should avoid buying bonds of a eurozone government close to the time that the government is selling bonds in the market, to prevent prices from being distorted.

These caveats, however, don't appear too stringent.

#3: Its Not the Final word

The advocate general's opinion doesn't end the process. The full Court is expected to issue its ruling by the middle of the year, though it typically follows the guidance of its adviser. The German constitutional court still must render its final verdict after taking the ECJ's decision into account.

#4: QE looks good to go

The opinion on OMT was never expected to completely derail QE. It's a different program with a different purpose. Still, strict limits on OMT could have tied the ECB's hands a bit on QE when it comes to the size of the program and seniority of ECB bond holdings.

Wednesday's opinion "means that no additional legal hurdles stand in the way of ECB QE, for which we see a 90% chance to be announced at one of the next two meetings," said Christian Schulz, economist at Berenberg Bank.

#5: The ultimate verdict

With the European Court having said its piece for now, it will be up to financial markets to decide whether any QE program is sufficient to boost the eurozone's growth prospects and lift inflation. That verdict could come as soon as Jan. 22.

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Sadly - for now - the EUR devaluation from the decision has been extinguished on the back of the weak US retail sales...