By Mike Dolan
LONDON, Dec 16 (Reuters) - The world's central banks are set to withdraw trillions of dollars of monetary support from hobbled banks and debt-laden governments next year and the grand exit of 2010 may well be as hair-raising as the rescue.
As economies re-emerge from deep slump, the U.S. Federal Reserve and European Central Bank this month outlined the first baby steps toward "normalising" ultra-loose money policies that helped stave off financial collapse over the past two years.
But long before they contemplate raising near-zero interest rates -- and consensus forecasts see little chance of that before the final months of 2010 in the United States, euro zone or Britain -- a slew of extraordinary measures that have ballooned central bank balance sheets will first have to be unwound.
Unusually cheap and lengthy liquidity injections to banks and a relaxation of collateral rules that magnified their impact need to be discontinued. And then the thornier issue of when to roll back purchases of government and private sector bonds -- quantitative easing or money printing -- kicks in.
The raw mechanics of the exit seems straightforward. Soundings are already been taken from practitioners; the International Monetary Fund claims to be coordinating between countries; and even some road tests, in the case of the Fed's recent "reverse repos", have taken place.
But execution is the easy bit. Politically and economically, the central banks' task is starting to look like an attempt to negotiate an obstacle course in reverse.
For a start, central banks need to keep one eye on investor fears of runaway inflation if they signal any delay in mopping up the excess cash. Another eye will need to be on newly-assumed financial stability mandates that may well argue against kicking away banks' monetary crutches too early.
Looming pressure from governments, anxious about the impact of monetary tightening on public debt mountains bequeathed to them by the crisis, will likely be an even bigger hurdle.
The national debt problems of Greece, Ireland and Spain, not to mention Britain and United States, show how politically sensitive bond market stability will be in the years ahead.
"When", and not "if" or "how", is therefore paramount and timing the move will likely set off a cat-and-mouse game with financial markets for months to come.
Move too early and debt and equity may investors run scared; move too late and asset bubbles will be pumped up and inflation expectations will become emboldened.
SIX IMPOSSIBLE THINGS
The IMF, hosting a conference on exit strategies earlier this month, inadvertently captured the near absurdity of this multi-dimensional challenge.
Paraphrasing capital markets director Jose Vinals, the IMF said there was general agreement exits should be conducted in "an environment of sustained, stable, strong and balanced growth which in turn meets a number of preconditions such as maintenance of price stability, viability of public finance, financial stability and a competitive environment."
Based on these criteria, some may question whether central banks will ever exit.
And, with a nod to Lewis Carroll's Through the Looking Glass, JPMorgan Asset Management's global strategist David Shairp described the wish-list handed to central banks as "six impossible things to do before breakfast".
What seems certain is the simpler -- if flawed -- world of narrow inflation-targetting will be a big casualty. And with it the related forecasting, investment and economic planning certainties that it fostered for well over a decade.
For markets whose nature is to second-guess the policy outcomes, there may be a very volatile period ahead.
For some economists, the stakes are higher and the future of central bank independence may be in the balance.
Accusing central banks of "blindness" in the run-up to the crisis, London School of Economics professor and former Bank of England policymaker Willem Buiter wrote this week that central bank actions during the crisis were little short of anti-democratic and may well prompt a political backlash.
Buiter, last month named as Citigroup's chief economist, said unwinding unconventional policies was "technically easy" but timing the moves risked conflict with fiscal authorities and a row over the central banks' role. Any battles would likely be won by the Treasuries, with the possible exception of the euro zone where the multinational ECB could face down any one of the 16 national governments.
Exits would likely reveal the "extraordinary quasi-fiscal role" played by the Fed and other central banks and their usurpation of budgetary powers assigned to government lawmakers, Buiter said, adding further questions over the massive financial aid handed to such a small number of firms and stakeholders.
"The sheer magnitude of the redistribution of wealth and income among private agents that the central banks have engaged in could (and in my view should) cause a political storm. Delay in the dropping of the veil is therefore likely."
(Editing by Ruth Pitchford)