ECB bond buy program idles, some see reactivation

FRANKFURT (Reuters) - The European Central Bank bought no government bonds for the 20th straight week last week despite a rise in Spain and Italy's already painful borrowing costs, but expectations are growing it could start buying again soon.

The ECB has barely used its Securities Markets Programme (SMP) this year despite a severe intensification of the euro zone debt crisis, which has seen Spain and Cyprus join Greece, Ireland in Portugal in the bloc's bailout club.

But last Thursday ECB President Mario Draghi pledged to do whatever it takes to protect the euro - a bold statement that many analysts said indicated the SMP could be reactivated or that the ECB could buy bonds using a new programme.

Spain and Italy's borrowing costs came down after Draghi's statement as markets hope for a solution to the debt crisis. The ECB has already cut euro zone interest rates to a record low of 0.75 percent.

Last week's lack of purchases by the ECB keeps the amount it has spent since starting the SMP back in May 2010 at 211.5 billion euros.

As usual, the ECB will take the same amount as weekly deposits from banks on Tuesday to counterbalance the buys and neutralize any threat of them fuelling inflation.

Under the programme, the ECB and the 17 euro zone national central banks buy government bonds second hand on the secondary market from banks and other bondholders, a tactic that allows it to avoid claims it is directly financing governments.

The ECB also does not give a country-by-country breakdown of its purchases, but euro zone sources say it has spent about 40 billion euros on Greek debt and concentrated on Italian and Spanish debt with the 140 billion euros spent since August.

Critics say the programme treads dangerously close to the ultimate ECB-taboo of financing governments, but many economists believe unrestricted purchases by the bank may be the only way to bring the debt crisis under control in the short term.

The central bank has been badly scarred by the programme. The failure of the purchases to tame the crisis has hurt its reputation and last year it saw two top German policymakers, Axel Weber and Juergen Stark, quit over the purchases.

(Reporting by Sakari Suoninen)