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FRANKFURT (Reuters) - A German-led faction at the European Central Bank is leading a riposte against the bank's unprecedented loosening of lending policy and may be pushing at an open door this time after a string of setbacks that left the ECB deeply divided last year.
Bundesbank chief Jens Weidmann is leading the charge, pressing for the ECB to think about an exit strategy after it unleashed more than 1 trillion euros into the financial system in the last two months in twin ultra-long funding operations.
A leading German newspaper published details last week of a letter Weidmann wrote to ECB President Mario Draghi to air his concerns about risks stemming from an ECB move to ease rules on the collateral banks must put up to tap its funding operations.
Weidmann went fully public on Saturday, telling German weekly news magazine Spiegel: "The programme may have a calming effect in the short term but it is a calm which could be deceptive."
On the face of it, the debate has echoes of a division last year on the ECB's Governing Council that saw two Germans quit in protest at the bank's buying of sovereign bonds - a measure they felt came too close to financing governments.
Then, markets were rattled by the internal discord and the question mark it put over the ECB's ability to act decisively.
This time around, however, the personalities involved are more collegiate and the policy differences are over the detail of what collateral the ECB should accept rather than the fundamental nature of its crisis-fighting strategy.
Nobody could accuse the Draghi-led ECB of not acting decisively since he took the helm late last year but the signs are that even he believes the central bank has now done its bit to tackle the euro zone debt crisis.
The Bundesbank has support for this week's second ultra-long lending operation to be the last, with the ECB already unwinding any expectations that it could offer further bumper cash injections after banks grabbed 530 billion euros on Wednesday.
Draghi told European leaders at a summit on Thursday not to expect a further injection of long-term cash into their banks, according to officials.
The twin funding operations have banished the threat of a credit crunch but Bundesbank-led ECB hawks worry that the ploy risks fostering banks forever dependent on external support, fuelling imbalances between strong and weak euro zone members and priming an inflationary timebomb for the future.
Draghi's message that the ECB has no more funding bonanzas to come will appease these hardliners who lost some key decisions last December - a cut in interest rates to a record low of 1 percent, and the loosening of the collateral rules.
"My impression is that Draghi is smarter in dealing with the Bundesbank than (former ECB president Jean-Claude) Trichet," said Berenberg Bank's Christian Schulz, a former ECB economist.
"While Trichet found this murky compromise with the bond purchases, which was attacked on legal grounds by the Bundesbank, Draghi found a different weapon which cannot be challenged legally," he said.
Weidmann wrote to Draghi last month to express concerns about risks resulting from the decision the ECB took in December to ease rules on the collateral banks must put up to tap its funding operations, a central bank source said on Thursday.
That decision, which Weidmann opposed and now wants reversed, resulted in some 800 banks partaking in the ECB's second offer of one percent money on Wednesday - a marked increase from the 523 bidders at the first round in December.
The publication of Weidmann's letter to Draghi in the Frankfurter Allgemeine Zeitung daily comes against the backdrop of a debate in Germany about euro zone imbalances, with the president of the Ifo think tank, Hans-Werner Sinn, arguing that stronger countries are financing the deficits of the weak.
"Mr Weidmann is doing his best to record the Bundesbank's doubts about the extended use of collateral within the Eurosystem and is making his point in a rather forceful fashion," said David Marsh, author of 'The Euro: The Politics of the New Global Currency'.
"Ultimately Mr Weidmann has only one vote within the 23-person ECB council. His power is limited to his sway over German public opinion and in German politics, but this may turn out to be more effective than many people think," said Marsh, who is co-chairman of think tank OMFIF.
Weidmann feels that as chief of the biggest national central bank in the euro zone he must express his views and argue his case, in public if necessary. He believes the Bundesbank's credibility depends on it having the trust of the German people and is fiercely protective of its independence.
He has distanced himself from German Chancellor Angela Merkel, to whom he was previously a top adviser, since moving to the Bundesbank last year and has been at odds with Berlin over its push for the private sector to be involved in shouldering the cost of bailouts.
Weidmann says privately that to quit as his predecessor, Axel Weber, did would not help the Bundesbank make its point among the Eurosystem of euro zone central banks.
"My daughter leaves the room when she doesn't get what she wants, but she still doesn't get what she wants. If I do the same, how does the Eurosystem look?" he asked last year.
Draghi also knows it is in his interests to keep Weidmann onside as the Bundesbank, which is renowned for its inflation-fighting tradition, could help lend credibility to the ECB's exit strategy when it starts to tighten monetary policy.
The Italian, who took the ECB helm last November despite the concerns of many in Germany, has given Weidmann some comfort by saying he does not believe the collateral rules should be eased any further even if the euro zone takes a turn for the worse.
The Bundesbank wants to go further by assessing the idea of peripheral euro zone central banks providing collateral to those in the bloc's core as a back-up for the imbalances in the currency area's TARGET2 payments system - the source of Sinn's concerns - though this idea is unlikely to get much support.
"Rather than being a reflection of tensions between Weidman and Draghi, as widely reported, could the leaked letter be a reflection of Weidman's dilemma in handling the conflicts between the complexities of monetary policy at the ECB and legalistic and accounting matters back at the Buba?" asked Erik Neilsen, global chief economist at Unicredit.
The pressure from the Bundesbank and unease among other ECB policymakers about the inflation and bank-dependency risks associated with the bumper liquidity injections mean Draghi nonetheless has little margin for further crisis-fighting steps.
This helps explain his message to governments late on Thursday that they can afford no let-up in reforms.
If the threat of deflation arose, the Bundesbank could countenance some form of quantitative easing but it will draw the line at buying government bonds in any great size.
Deflation is not an immediate threat. Euro zone inflation actually accelerated slightly to 2.7 percent in February from 2.6 percent in January.
As a result, ECB watchers expect a period of policy stasis which in turn will keep a lid on any internal divisions.
Writing by Paul Carrel, editing by Mike Peacock