UPDATE 3-Draghi defends bond-buying plan in lion's den

* ECB chief defends policies to German lawmakers

* Bundestag grills Draghi on bond buys, Spain, bank role

* Draghi says deflation a greater risk than inflation

* Greece says to get 2 more years to meet bailout target

* Germany, Draghi say no decision yet on Greece

BERLIN, Oct 24 (Reuters) - European Central Bank President Mario Draghi gave a robust defence of his bond-buying plan to ease the euro zone debt crisis, telling sceptical German lawmakers that fears of illegal funding of governments or stoking inflation were misplaced.

Draghi emerged from the lion's den of the Bundestag lower house smiling after a two-hour grilling behind closed doors on Wednesday on the ECB's Outright Monetary Transactions (OMT) programme, which the German central bank has denounced as tantamount to printing money to finance governments.

Rebutting the main objections point by point, Draghi said in an opening statement released by the ECB: ``First, OMTs will not lead to disguised financing of governments.

''Second, OMTs will not compromise the independence of the ECB ... Third, OMTs will not create excessive risks for euro area taxpayers ... Fourth, OMTs will not lead to inflation.``

Indeed, falling prices in some countries posed a greater risk than inflation, he said, while the ECB's counter-measures lay above all in the interest of Germany as the euro zone's biggest creditor, two lawmakers in the room reported.

The rare appearance in a national legislature underscored how important it is for Draghi to keep politicians in Europe's biggest economy on-side amid a broader German backlash.

Asked afterwards if he felt he had accomplished his mission and no longer needed to lose sleep over German public opinion, the Italian ECB chief said: ''Oh, that would be too ambitious ... The proof is in the eyes of the beholder.``

Several lawmakers in Chancellor Angela Merkel's centre-right coalition praised his attendance and his answers.

''This should put an end to any doubts about the seriousness of the ECB's policy,`` said Volker Wissing, a senior lawmaker from the Free Democrats, Merkel's junior coalition partners.

Conservative Norbert Barthle, a senior member of Merkel's CDU party on the budget committee, said he had questioned Draghi on his strategy for exiting the bond-buying programme and how he would ensure price stability in the long term.

''His answers were very convincing, and we can therefore give the message to German citizens that fears of inflation that have been expressed here and there are unfounded,`` said Barthle.

Outside parliament, the reception was less warm. A handful of Eurosceptic protesters demonstrated in red T-shirts bearing the slogan: ''Hands off the printing presses, Mr Draghi!``

One banner read: ''ECB = Bad Bank.``

Frank Schaeffler, a Eurosceptic rebel in Merkel's coalition, called the ECB chief ''a dove in hawk's clothing`` and insisted that ''inflation will be the bitter consequence`` of his plan.

Unveiled in early September, the ECB bond-buying programme aims to support troubled euro zone states such as Spain by reducing their borrowing costs, provided they request aid and submit to strict policy conditions and monitoring.

Even though it has not yet been implemented, the policy has already helped the euro zone's crippling three-year crisis, as peripheral countries' bond yields eased in anticipation, but German critics say it violates an ECB taboo on financing governments, taking the bank into dangerous new territory.

Draghi said the central bank had considered the possible risks carefully and designed the programme to minimise them. ''But I am aware that some observers in this country remain concerned about the potential impact of this policy,`` he added.


Draghi addressed a joint session of the budget, European and foreign affairs committees on a day when business surveys suggested hitherto resilient Germany is now being sucked into the euro zone's economic malaise.

In Athens, Greek Finance Minister Yannis Stournaras said Greece, the state where the debt crisis erupted in 2009, had been granted its long-standing request for two more years to achieve its fiscal targets under a second bailout programme after months of negotiations.

Both Draghi and German Finance Minister Wolfgang Schaeuble said that while there had been progress in the talks, they would await a review by the so-called troika of inspectors from the IMF, ECB and European Commission, which has yet to be completed.

A draft of agreed measures and targets between Greece and its lenders obtained by Reuters showed that austerity cuts would be spread over four years as sought by Athens, rather than the two originally envisaged in the bailout agreement.

Draghi's hearing focused mostly on concerns about the bond-buying strategy.

Jens Weidmann, head of the Bundesbank, opposed the plan from the outset, as did conservative German media, and the Bundesbank renewed its public assault on the policy as recently as Monday, warning of a transfer of risks to European taxpayers.

''What the ECB is doing at the moment has nothing to do with its mandate,`` Klaus-Peter Willsch, a lawmaker from Merkel's Christian Democrats (CDU), said before the session.

Another Merkel ally denounced Draghi as a ''Falschmuenzer``, or counterfeiter, after he announced the OMT plan.

Draghi was not the first ECB president to appear in the Bundestag. His French predecessor, Jean-Claude Trichet, along with former IMF chief Dominique Strauss-Kahn, briefed lawmakers in April 2010 on the first financial bailout for Greece.

But Wednesday's session was a rarity. The ECB was designed to be fully independent, and its president is not answerable to politicians. The briefing took place because Draghi volunteered to explain his policies in Berlin after they triggered uproar.


Merkel, many of her conservative allies and opposition parties like the Social Democrats (SPD) and Greens support the ECB chief's programme, but many lawmakers wanted to know more about the kind of aid programme and conditionality involved.

This is crucial for Spain, which has resisted putting in a formal request for state aid, in part because of concerns among Spanish leaders and voters that they would be forced to take additional painful measures on top of the budget cuts, tax rises and economic reforms already enacted.

Many of Merkel's allies are resistant to a Spanish rescue precisely because they fear it would trigger ''unlimited`` bond purchases by Draghi's ECB.

''There is a lot of opposition to a programme for Spain. They are against it because they fear it would open the floodgates at the ECB,`` said Guntram Wolff, deputy director of the Brussels-based Bruegel think-tank and a former Bundesbank economist.

Barthle said his colleagues also sought assurance from Draghi that plans to give the ECB new responsibilities for supervising banks across Europe would not interfere with the bank's core monetary policy task.

SPD budget spokesman Carsten Schneider said his party had the feeling German taxpayers would still end up footing the bill and added: ''Ultimately, Mr Draghi could not clear that up.``

But amid the concerns, there was general agreement that Draghi had done the right thing in offering to explain his policies at a time when many citizens in Europe feel momentous decisions are being taken without their input.

''One of the big problems of Europe is that European institutions only talk to voters through national governments,`` said Wolff. ''So it's important to have a direct link to the people, and this is a step in that direction.``