European Central Bank president Jean-Claude Trichet: the bank has signalled it is thinking about its exit strategy

With the eurozone coming out of recession and the international money markets healthier than at any time since the banking crisis began in earnest last year, there is a real prospect of central banks beginning to withdraw some of their emergency support measures in the first half of the new year.

For instance, banks took €75bn from the European Central Bank one-year refinancing window at the most recent offering. This may seem like a lot, but it was only about half the €135bn the market expected to be lent. More significantly, it was nowhere near the €442bn that flooded the markets when the ECB first provided one-year money in June.

This should be good news, but it could be bad news for those Irish banks that have come to rely on ECB funding to stay in business through the crisis, especially if – as seems likely – the rest of the eurozone comes out of recession before we do. If the ECB withdraws liquidity before Irish banks are ready to raise money elsewhere, the increased lending the economy is counting on might not materialise, even with Nama.

Last year, as interbank lending and debt markets seized up, the world's major central banks – the ECB, the US Federal Reserve and the Bank of England – used two levers to help avert a complete meltdown of the financial system and the economies that depend on it. They instituted massive funding support programmes by lending cheaply to banks against a variety of collateral as well as offering to buy asset-backed securities to enhance liquidity.They also slashed interest rates, which drove down lending rates in general.

Now that economies are beginning to improve, there is speculation about when these measures will be unwound. Much of the focus has been on whether the ECB will raise rates, but little is being said about the withdrawal of emergency support measures such as liquidity provision and covered bond purchases.

Policy-makers have pledged to scale back their emergency measures when the economy strengthens so that the abundance of cash in the economy doesn't stoke inflation. As demand for additional liquidity wanes, the ECB may simply decide not to renew some of its emergency loans when they mature, thus reducing the amount of money in the banking system.

The central bank will not start to raise interest rates until the third quarter of next year, a Bloomberg survey of economists shows. Another poll, by Reuters, found a near-unanimous belief among economists that the ECB will start withdrawing its special liquidity measures before tightening policy rates. That puts the end of liquidity support sometime before the middle of next year.

ECB officials have confirmed that the liquidity will not be pulled back this year, but the bank is thinking about its exit strategy.

"This is a field where 'life support' from the central banks may not be needed in this full amount in the future," ECB governing council member Ewald Nowotny said late last month. "There are very slight improvements going on market by market but it is too early to say that we are fully on the safe side. In general, especially also as it is a protective shield, a central bank presence is needed. But it is our intention not to see this as a permanent feature. Given the state of the economy as it is for the time being, that means for this year, we do not see a need to start executing an exit strategy but we should start of course discussing it and different approaches."

There are also signs that the ECB will ultimately limit its objectives strictly to fighting inflation, rather than propping up banks. According to statements made by ECB executive board member Lorenzo Bini Smaghi, the central bank is going to leave the liquidity problems of weak financial institutions to national governments while the ECB gets on with what it calls 'price stability'.

That could leave Irish banks in a tight spot, as our domestic financial institutions have borrowed heavily from the ECB through the crisis. As European Commission president José Manual Barroso pointed out on his pre-Lisbon visit to Ireland, the ECB has lent more than €120bn to the Irish banking system, or 15% of total ECB lending. Some of that belongs to IFSC banks rather than the domestic covered institutions and their foreign-owned competitors, but statistics from the Central Bank do not provide bank-by-bank details.

RBC Capital Markets analyst Hank Calenti referred to this as 'life support' in a scathing report on the Irish banks in August. Calenti warned that the ECB was acting as a "lender of last resort" for the Irish banking system and that Nama bonds may simply be used to replace ECB funding lines as they are withdrawn, which would mean no net liquidity or lending benefit to the economy as a whole. As increased liquidity and lending are the key goals of Nama, such an outcome would represent a political and economic failure.

The banks in Nama will receive bonds equal to the value of the assets transferred minus their individual haircuts. That means AIB and Bank of Ireland, which expect haircuts around the 20% level, will do proportionally better than Anglo Irish Bank and Irish Nationwide, which will get chopped by more than 30%. They can then use these bonds in repurchase agreements either with the ECB or other creditors.

For Irish Life and Permanent, which will not be part of Nama, a pullback on ECB assistance would be catastrophic unless other funding lines became available. IL&P was relying on the ECB for 27% of its funding – €12bn – as of the end of June.

According to NCB banking analyst Ciaran Callaghan, the ECB won't just yank the money away. Instead it will start to shorten the maturities and raise the price on the money it lends, effectively forcing borrowers to look for sources of funding in private markets.

Whether Irish banks will be up to this within nine months remains to be seen. Discrete data on central bank dependence is scant and banks themselves became reluctant to disclose their ECB borrowings during the recent interim reporting season, a change some market sources attribute to an ECB wish to keep its assistance in Ireland quiet.

According to a presentation given to debt investors last month, Bank of Ireland has reduced its dependence on central banks from €17bn in March to €10bn in September. The bank also successfully raised €1.5bn in September in a covered bond issue outside the government guarantee, a major milestone for the sector. EBS is expected to follow in the new year after sounding out investors in Paris and London last week.

But the welcome for Irish institutions in the covered bond market is no doubt conditioned by the ECB's pledge to buy €50bn of covered bonds in the secondary market. In other words, the ECB is making itself available to provide liquidity in the bank bond markets by buying these instruments from the institutions that take up the initial issue.

Still, both AIB and Bank of Ireland have had successful unguaranteed bond issues in the past month too, so there are signs of life for the Irish institutions. The question is, can they all stand on their own two feet once the ECB unplugs the life support?