ECB keeps handbrake on as bond buys hit 8 billion euros

FRANKFURT (Reuters) - The European Central Bank showed no sign on Monday of bowing to fierce political pressure to ramp up its purchases of troubled euro zone governments' bonds, with data showing it restricted its spending to 8 billion euros last week.

The ECB is at the center of an intense political tug-of-war as the bank, backed by Germany, continues to resist calls from France and Italy -- and from the U.S., Britain and Russia -- to calm debt markets by being more forceful with its bond buying.

Its latest purchases take the total spent under the controversial programme started in May 2010 to 194.5 billion euros (for full details click).

The weekly amount of 7.986 billion was well below 10 billion euros forecast in a Reuters poll of traders and was less than 9.5 billion the ECB spent two weeks ago, despite the crisis having engulfed Italy and now threatening France.

Last week, the central bank bought just under 4.5 billion euros of bonds, and its weekly total has yet to get anywhere near a 20 billion euros limit reportedly imposed by the ECB's governing council.

There has been no clear change in the pattern of the ECB's bond buying since Mario Draghi took over as President from Jean-Claude Trichet earlier this month.

Despite the intensifying political pressure, Draghi and other leading voices in the ECB, such as Bundesbank head Jens Weidmann, continue to stick to their guns over purchases which they maintain remain a temporary measure to ensure the ECB's low interest rates have an effect and to see the euro zone through the worst of the crisis.

But ECB policymaker Ewald Nowotny -- the often-outspoken head of Austria's central bank -- said on Monday the bank needed to sit down at some point and discuss its future role in the crisis. <ID:L5E7ML1OH>

Outgoing ECB board member Juergen Stark acknowledged the sovereign debt crisis had spread from the euro zone's periphery to its core, describing such contagion as "a new phenomenon" but said other advanced economies were also facing debt problems.

"While there was a step-up in bond purchases, it is probably not sufficient considering the scale of the loss in confidence," said Thomas Costerg, an economist at Standard Chartered in London.

"If market sentiment deteriorates further, the ECB will have to gear up its purchases. In the very short term, this is the only way to bring back confidence. Austerity measures and (common) euro bonds will take time."

"The ECB should send a stronger message to the markets," Costerg added.

PAIN IN SPAIN

The last two weeks have been some of the most turbulent in the euro zone debt crisis.

Italy's borrowing costs remain well above what are widely considered sustainable levels despite a change of government.

Yields on Spanish bonds continued rising on Monday toward to 7 percent, the mark that led to bailouts in Greece, Ireland and Portugal, as Sunday's election victory for conservatives promising deeper austerity failed to calm markets.

Under the ECB's programme, known as the Securities Markets Programme, it and the 17 euro zone national central banks can buy government and corporate bonds from banks and other investors, but not directly from governments.

It was reactivated in August after a four-month break as the crisis moved to Italy and Spain, two of the euro zone's biggest economies.

The central bank does not give a country-by-country breakdown of its purchases.

However, analysts and traders estimate it has bought around 45 billion euros of Greek debt and has concentrated largely on Italian and Spanish debt with the 120 billion euros it has spent since the recent restart.

Purchases are reported every week but take two to three days to settle, meaning that when the bank is buying, the figures do not necessarily give the full picture.

The bank said it will hold its usual weekly 'sterilization' operation on Tuesday to counteract the inflationary impact of the purchases.

It will offer banks an interest rate of up to 1.25 percent to encourage them to deposit a combined 194.5 billion euros with it for a week -- equal to what it has spent buying bonds.