European Central Bank policymakers are at odds over whether to reactivate their controversial bond-buy programme, providing an early test for ECB President Mario Draghi who is growing frustrated with divisions among his team.

The disquiet has yet to reach the acrimonious levels of last year, when two German policymakers quit over the plan, but the emergence of divisions on the issue will do nothing to settle markets worried about Spain reigniting the euro zone crisis.

Despite a clutch of new policymakers joining the ECB this year, a classic north-south split has emerged on the 23-man Governing Council. The southern contingent favours pragmatism while the northerners are already pressing for an exit strategy.

Executive Board member Benoit Coeure, a Frenchman new to the policymaking team, fed market expectations that the ECB could reactivate the bond plan - or Securities Markets Programme (SMP) - by saying on Wednesday the instrument was still in place, should the need for it arise.

Will the ECB intervene? We have an instrument for intervention, the SMP, which has not been used recently but which exists, he said, exciting markets close to an inflection point beyond which they will start looking for ECB intervention.

Spain's bond yields are close to the psychologically important 6 percent level which, if broken, may raise concerns a door had been opened to 7 percent - a level beyond which debt servicing costs are widely deemed unsustainable.

ECB action could relieve some of this pressure and another policymaker, Spaniard Jose Manuel Gonzalez-Paramo, further fuelled expectations that the bond-buy programme could be reactivated by saying late on Thursday it was still alive.

Jacob Funk Kirkegaard of the Peterson Institute - echoing market expectations that the ECB is thinking about intervention - said commitments the Spanish government has made to austerity measures suggested a quid quo pro between Madrid and the ECB.

If Spain cuts spending and undertakes structural reforms, the bank will help out, he said in a research note on Thursday.


But the ECB's experience of using the bond-purchase programme last year was difficult and it will be cautious before reactivating the bond-buy plan, which it left unused for the seventh time in eight weeks last week.

Not only did the reactivation of the plan last August and its expansion to Italian and Spanish markets cause deep internal divisions at the bank, it also created a precedent which many of the ECB's policymakers will not want repeated.

The central bank's intervention in Italy's sovereign debt markets succeeded in sending Italian yields lower but the ECB was frustrated with Silvio Berlusconi's government for not passing reforms in return - as the ECB had pressed it to do.

An ECB source said excessive use of tools like the bond-buy plan diminished their effectiveness, adding if you use it every day for six months or a year its effect becomes negligible.

By simply raising the hypothetical idea of using the programme again, Coeure has already courted controversy.

Athanasios Orphanides, Cyprus central bank chief and a member of the ECB Governing Council, took a swipe at the Frenchman on Thursday, saying ECB policymakers should not commit the bank to using the bond-buying programme.

Orphanides' remarks are just a taste of what could follow if pressure to use the plan again increases.

Germany's Bundesbank staunchly opposes any reactivation of the programme, which it regards as taking the ECB into the realm of fiscal policy by effectively financing governments.

Bundesbank Chief Jens Weidmann said last month the ECB needed to discuss how and when to exit its non-standard policy measures - tools that include the SMP and long-term funding operations - rather than make further use of them.

Weidmann's predecessor Axel Weber - at the time in pole position to take the ECB presidency that Draghi now holds - quit in protest at the bond-buy plan last year. Another German ECB heavyweight, Juergen Stark, later resigned on the same grounds.

Weidmann is more diplomatic but Draghi, who initially went out of his way work with the Bundesbank, is growing tired of the German-led push to prepare a strategy to exit the non-standard measures the ECB has used to fight the crisis.

Under Draghi the ECB has made little use of the SMP, instead using twin 3-year funding operations to unleash 1 trillion euros into the financial system - a ploy that helped offset a credit crunch that risked exacerbating the euro zone crisis.

Draghi dismissed the Bundesbank-led push to begin preparing an exit at his monthly news conference last week.

Any exit strategy talking for the time being is premature, he said, adding bluntly: I think the president of the ECB is the one who has the last word on this.


The disquiet over the bond-buy programme may pass.

Deutsche Bank economist Gilles Moec saw Coeure's remarks as a cautious message to the market that need not lead to ECB bond-buying: You first start with just reminding the market that it is there, and then you look at how the market reacts, he said.

If the market doesn't react, it doesn't mean that you have to react. You may want to look at other options, Moec added. The ECB will always take more time than the market thinks.

The SMP may not even be the right tool for euro zone policymakers to use to deal with Spain.

If you think there is transitory turbulence and then things will normalise, it can be a bridge, Moec said of the programme. If the market starts taking a more structural view of where Spain is heading, it's probably not the right instrument.

Under such a scenario, euro zone policymakers may push Spain to tap the EFSF bailout fund to recapitalise its banking sector. The Bundesbank would certainly favour this to using the SMP.

Joerg Asmussen, a German who is part of the new generation of ECB policymakers that includes Coeure and Weidmann, said on Friday he saw signs of stabilisation in sovereign debt markets.

Asmussen, who works with Coeure on the ECB's six-man board that forms the core of the broader Governing Council, is very much a diplomat at the ECB who helps work out differences. He left open the possibility of the ECB intervening in Spain.

We see signs of stabilisation in sovereign debt markets though in a still fragile environment. We all see what happened to Spain in the last days, he told a conference in Berlin.

(Additional reporting by Eva Kuehnen in Frankfurt and Annika Breidthardt in Berlin, editing by Rosalind Russell)