Published: Friday, 30 Oct 2009 | 2:09 AM ET

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The European Central Bank will start rolling back its liquidity lifeline to banks next year and very long-term operations could be among the first to go, ECB Governing Council member Axel
Weber said on Thursday.

Michael Probst / AP

Weber said the central bank should keep its policy of full allotment at main liquidity operations for longer, in comments which analysts saw as a sign the ECB's one-year operations were unlikely to be renewed past December.

The Bundesbank president is the first policymaker to hint at how the ECB might stagger the withdrawal of its extra liquidity measures, which the ECB has only promised will run beyond the end of 2009.

Over the last year, the ECB has lent banks all the money they request at fixed interest rates and conducted additional six- and 12-month liquidity tenders, flooding markets with funds.

"Exit from unconventional measures should come gradually," Weber said in the text of a speech at a banking conference in Berlin, adding later that this would likely be in 2010.

"For example, the full allotment policy for main refinancing operations should, looking from today's perspective, surely be kept in place for longer than the very long-term liquidity injections."

Analysts said Weber's comments suggested the ECB would not renew its 12-month refi operations and that the third operation scheduled for Dec. 16 would likely be the last.

"Weber's intention seems to ensure that euro area banks should start to plan right away ... for a likely exit by the ECB from providing ultra long term refinancing in 2010,"  Barclays Capital economist Julian Callow said in a note to investors.

Since Weber was eager to start those operations, this suggests the ECB could say in December that that month's 12-month tender would be the last one, Callow added.

Euro zone government bond and interest rate futures briefly dipped on Weber's comments.

Weber said later he did not want to set a more exact time horizon for the withdrawal of liquidity. "It would be counter-productive to set a concrete time frame," he said.

He was not worried about gaining support for implementing the exit measures in the decision-making Governing Council, Weber said.

Fellow policymaker Guy Quaden and Mario Draghi, speaking at events in their native Belgium and Italy, gave no sign of any imminent change to the ECB's stance.

Economists polled by Reuters see rates on hold until the fourth quarter of 2010.

Stimulus Measures

Weber said it was not time to exit from the non-traditional measures yet, but added it should be planned currently.

The improvement seen in financial markets and also in the economy depends still in large part on stimulus measures, Weber said.

"Despite all encouraging signs of improvement, the economy and the financial markets still get a lot of their energy from political support measures," Weber said.

"All-in-all, it is appropriate not to remove the monetary and fiscal stimulus hastily."

But he added they should be not kept in place for too long either in their current form.

Banks should also work actively to withdraw themselves from public support measures, Weber also said.

"Banks should gradually taper off from taking the medication prescribed by the central banks," Weber said.

"Continuing life dependent on central bank liquidity injections is not an option for an enduring future and surely not a viable business model."

He also said there had been movement towards safe terrain in the financial markets during the past few months, but the situation was still in many ways worse than before the Lehman Brothers collapse in September 2008.

The ECB said on Wednesday credit tightening by euro zone banks has reached a turning point, after a survey showed fewer banks are setting tougher loan standards.

Weber said the credit situation would likely continue to worsen until mid-2010 in Germany because it lags the economic cycle. He was upbeat about the prospects of an economic recovery but admitted there may be setbacks along the way.

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