ECB steps up bond buys as New Year lull ends

A sculpture showing the Euro currency sign is seen in front of the European Central Bank (ECB) headquarters in Frankfurt December 8, 2011.

FRANKFURT (Reuters) - The European Central Bank more than tripled its bond purchases last week to the highest level since late November, spending 3.77 billion euros (3.11 billion pounds) as a calm start to the New Year gave way to an intensification of the euro zone debt crisis.

The ECB's bond purchases face renewed scrutiny after Standard & Poor's mass euro zone rating downgrades on Friday, though the bank has resisted political pressure from within and beyond the euro zone to step up the programme on a major scale.

The latest purchases take the total the ECB has spent on bonds since starting the programme in May 2010 to 217 billion euros. That is a marked increase on the 1.1 billion it bought the week before but remains well below the levels it spent last year as the euro zone debt crisis escalated.

The central bank significantly reduced its bond purchases in the run-up to last month's EU summit as it raised pressure on government leaders to take more aggressive action to arrest the bloc's troubles.

But following S&P's salvo of euro zone downgrades on Friday, and the in the face of a rising risk of an unruly Greek default, traders said the ECB bought Italian government bonds on Monday and that the intervention offset pressure from the downgrade.

Many economists see the ECB as the only institution with firepower to calm bond markets if the debt crisis worsens, but ECB President Mario Draghi and other top policymakers have continued to reject calls for the bank to ramp up its purchases.

Critics, including Juergen Stark who recently quit the bank over the purchases, argue they tread dangerously close to the ultimate ECB taboo of financing euro zone governments.

However, the ECB decided late last year to funnel masses of cheap money to banks - a move that could help support demand for sovereign debt. A strongly bid Spanish sovereign auction and a drop in Italy's borrowing costs at another debt sale last week suggest at least some banks are using the money to buy bonds.

The ECB and the 17 euro zone national central banks buy bonds under what it calls its Securities Markets Programme (SMP). As European laws forbid the ECB from buying direct from the governments themselves, it buys them from banks and other investors on the secondary market.

It reactivated the programme last August after a four-month break as Italy and Spain, two of the euro zone's biggest economies, began to get dragged into the debt crisis. Since then it has spent around 140 billion euros.

The amounts bought are reported by the bank every week but take two to three days to settle, meaning that when it is buying, the figures do not necessarily give a full picture.

It doesn't give a country-by-country breakdown of its purchases either but analysts and traders estimate it has bought around 40 billion euros of Greek debt and has concentrated largely on Italian and Spanish debt since the August restart.

As usual, the ECB will hold a 'sterilisation' operation on Tuesday to neutralise the inflationary pressure the bond buys create. It does so by getting banks to deposit enough money on a weekly basis to balance out the total it has spent on bonds.

(Reporting by Paul Carrel)