By Paul Carrel
FRANKFURT (Reuters) - The European Central Bank will resist pressure to do more to fight the euro zone crisis when it meets in Barcelona on Thursday, holding fire despite calls to restart its bond-buying program to help austerity-hit Spain.
Financial markets are clamoring for the ECB to step up its efforts to fight the two-year crisis by buying the sovereign bonds of Spain, which is in recession and is struggling to convince some of its people of the need for further austerity.
But ECB policymakers, who will face demonstrators protesting against Spain's harsh austerity measures in the Catalonian capital, are more likely to pay homage to the country's drive to cut costs than to signal any new policy action like restarting the bond-buy program, or Securities Markets Programme (SMP).
The bank has left the plan dormant for the last seven weeks despite a rise in Spanish yields to 6 percent. A break above that, to 7 percent, is considered an unsustainable price to pay for refinancing its debt.
"I think the reactivation of the SMP will occur only at a point at which the situation has deteriorated significantly and I think the pressure would have to be greater than that we've seen in recent weeks," said RBS economist Nick Matthews.
The ECB will almost certainly leave its main interest rate on hold at a record low of 1 percent, though markets will be listening for any hint that the bank could be ready to cut later this year if the euro zone economy deteriorates further.
ECB President Mario Draghi faces resistance from Germany's powerful Bundesbank to any potential interest rate cut or a reactivation of the bond-buy programme, which the central bank could use to lower Spanish bond yields.
"The euro crisis has not escalated to such an extent recently that he would want to take on the Bundesbank on that," Berenberg Bank economist Holger Schmieding said of the bond-buy programme.
Bundesbank chief Jens Weidmann told Reuters last month Spain should take the rise in its bond yields as a spur to tackle the root causes of its debt woes and not look to the ECB to help by buying its bonds.
A Reuters poll taken last week showed three-quarters of economists saw the ECB restarting its bond purchases within the next three months.
However, in a separate poll, most money market traders said the bank would not buy more bonds.
With Spain sinking into recession in the first quarter, much attention at Draghi's post-meeting news conference will focus on what more - if anything - the ECB might do to promote growth.
Spain and its problems are at the heart of a downturn in euro zone confidence. Protests at the ECB's tough stance toward struggling euro zone countries are expected outside the meeting in Barcelona and officials have stepped up security.
The frustration stems from tough austerity measures Spain is pursuing to shape up its public finances and a grim economic picture, which is affecting the broader currency bloc.
Preliminary euro zone purchasing managers' (PMI) data released last week - and since confirmed - showed the euro area's private sector slump deepened in April at a faster pace than any economist polled by Reuters predicted, dampening hopes the region will emerge from recession soon.
The prospect of the euro zone as a whole following Britain into recession has set markets wondering whether the ECB could pave the way for a rate cut later this year. It has never before lowered its main rate below 1 percent.
Draghi said last week any "exit strategy" from the ECB's emergency measures - long-term lending operations and the dormant bond plan - was premature given weak economic conditions and he has not ruled out cutting rates below 1 percent.
"He will probably emphasize the downside risks to growth without getting close to signaling a rate cut for June," said Berenberg's Schmieding.
"A June cut is not likely but it is not impossible and he will likely keep the options open when asked about it."
ECB Vice President Vitor Constancio said after the publication of the PMI data there were "very significant" risks to the economy, adding the bank would adapt its policy if those risks became a reality, as it did when it cut rates last year.
If that view makes it into the ECB policy statement that all 23 of the bank's policymakers agree at their meeting, rate cut expectations that have begun to creep back into market pricing in recent weeks are likely to firm rapidly.
Draghi helped shift the tone of the economic policy debate in the euro zone last week when he advocated a "growth compact" without spelling out exactly what he meant.
French presidential candidate Francois Hollande, who wants to step away from German-inspired austerity, has welcomed Draghi's comments and the ECB president will be pressed to flesh out his growth vision.
Draghi has so far pressed governments to pursue structural reforms. He is under pressure to limit the ECB's role in generating growth from Weidmann, who wants countries to put their finances in order rather than looking to the central bank.
"A consistent budget clean-up and determined structural reforms are the best growth policy, because that way trust is achieved and economic performance is strengthened," the Bundesbank chief told German weekly newspaper Die Zeit.
(Writing by Paul Carrel; Editing by Jeremy Gaunt and Elizabeth Piper)