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BRATISLAVA (Reuters) - The euro zone could fall back into recession this year, an ECB Governing Council member said on Monday, adding the bank's non-standard measures were a significant funding and confidence boost.
A surprise upturn in the euro zone's service sector this month raised hopes the region may escape recession in 2012, even though the broader economy outside Germany is still struggling to gain traction.
The single currency area was likely to avoid a slip into a "deep recession," but will probably wallow in a mild recession until the second half of this year, according to a Reuters survey from January.
The European Central Bank (ECB), which pumped 489 billion euros into the financial system in December in its first-ever offering of three-year loans to help banks' funding strains amid the European sovereign debt crisis, will do so again next month.
"The banks' significant need in the first three-year operation shows that ECB's non-standard measures provide a significant contribution for financing of banks, supporting financial conditions and confidence," Jozef Makuch, who also heads the Slovak central bank, told daily Hospodarske Noviny in an interview.
Makuch warned the banks' dependency on the ECB short-term funding was rising, adding financing problems could hurt loan supply and have negative impacts on real economies.
"The market is still not functioning, we see some opening of markets with unsecured securities, but we are at the beginning of this process and hope it will continue," Makuch said.
Makuch said the ECB's bond-buying program, aimed to ease borrowing stress of debt-troubled countries like Italy, was neither automatic, nor without limit.
"Governments in the euro zone must cut excessive deficits and, in time, reach structurally balanced or surplus budgets. Countries at risk must fix slides in consolidation swiftly," Makuch said.
EU leaders will meet on Monday to sign off on a permanent rescue fund for the bloc and are expected to agree on a balanced budget rule in national legislation, with unresolved problems in Greece casting a shadow on the discussions.
Reporting by Martin Santa; Editing by Ramya Venugopal