Bank support exit to continue in 2011: ECB's Quaden

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Two factors explained the ECB's decision to extend unlimited credit: nervousness common around the year-end in money markets and the fact that a number of long-term operations expired then.

NO DOUBLE DIP, BUT SLOWER GROWTH

Quaden's colleague, the hawkish Bundesbank head Axel Weber, said fears of the euro zone suffering a return to recession or a period of deflation were unfounded.

"I do not share fears of a double recession or deflation," Weber said in a speech at the first day of the annual Banks in Transition conference that will attract top executives from the financial world.

He warned, however, that it was too early to declare the financial crisis over, saying markets remained characterized by uncertainty, exemplified this week by fresh jitters about the health of Europe's banks.

In comments released on two Belgian newspaper websites, Quaden said euphoria regarding the economic recovery was premature, but that optimism was legitimate.

Euro zone growth was dragged up by a stellar performance from Germany in the second quarter but with major economies like the United States struggling, most experts expect some slowing later this year and beyond.

European Central Bank Executive Board member Juergen Stark said on Tuesday economic growth in the euro zone was likely to fade in the second half of the year in line with other parts of the globe, pointing to risks beyond 2010.

"We are pleased with the recent economic developments, however we have also said that we see certain risks for the economic outlook beyond this year," he said.

Weber said fiscal repair measures being implemented by heavily indebted euro zone countries were enough to prevent state insolvencies.

"The sum of measures initiated by governments, in cooperation with the IMF, should be enough to end discussions of a potential state insolvency in the markets," said.

Quaden cautioned, however, that credible plans had to be put in place to cut deficits.

He said stimulus packages by governments and monetary authorities had averted the worst during the crisis in 2008/2009. Over time, though, the negative effects of budget deficits would outweigh the positive impact.

"I do not plead, and nor does (ECB President) Jean-Claude Trichet, for brutal and immediate austerity, except in the case of Greece. What is necessary is quickly to put in place credible plans gradually to clean up public accounts," Quaden said.

Debt fears continue to blight heavily indebted euro zone perimeter countries.

The Portuguese 10-year debt yield spread against benchmark German bunds hit its widest since May on Wednesday, while the 10-year Irish spread marked a new euro lifetime high at 389 basis points on Tuesday.

Asked whether financial markets, with low long-term interest rates, were right to fear deflation, Quaden told Belgian business dailies L'Echo and De Tijd: "You cannot rule out that the bond markets are overdoing it at the moment."

Both Federal Reserve Chairman Ben Bernanke and Trichet had been clear at a conference in Jackson Hole, Wyoming, that high inflation was not a good way to stimulate the economy or to cut government debt, Quaden added.

(Writing by Philip Blenkinsop; Editing by Mike Peacock)