By Gabi Thesing Feb. 9 (Bloomberg) -- The European Central Bank may be forced to delay the withdrawal of emergency lending measures because it could inflame financial-market concerns about Greece, Spain and Portugal, economists said. Investors are already dumping those countries’ assets as their governments struggle to rein in budget deficits, making it more expensive for them to finance the debt. Should the ECB push ahead with its exit strategy by pulling its unlimited cash support for euro-area banks, interest rates could rise, further undermining confidence in Europe’s economic recovery. “Banks in Greece, Spain and Portugal are disproportionately dependent on cheap ECB cash so any whiff of that drying up and weakening the banking sector further will rattle markets ,” said Colin Ellis , an economist at Daiwa Capital Markets in London. That “strengthens the case for the ECB to slow down its exit.” The ECB wants to withdraw the measures it introduced to nurse Europe through its worst recession since World War II to avoid inflation down the road. It has already announced it will stop giving banks 12 and 6-month loans, and will decide next month whether to revert to an auction procedure in its refinancing operations. The ECB currently lends banks as much cash as they want at its 1 percent benchmark rate . Next Step ECB officials including Juergen Stark , Yves Mersch , Axel Weber and Erkki Liikanen have said they favor a return to conventional measures as soon as economic and financial-market conditions allow. Weber said on Jan. 27 that the next step in the ECB’s exit could be taken before the end of the first half. Economists including Laurent Bilke , who previously worked at the ECB, said the central bank should hold off returning to an auction in its main weekly tender until at least the second half of the year. He said a return to normal refinancing operations would drive the Eonia overnight rate , or the interest European banks charge each other for overnight loans, about 70 basis points higher toward the ECB’s 1 percent benchmark. “If the ECB exits too soon, it could exacerbate problems for the weaker economies that are most sensitive to short-term market rates, making it more difficult and expensive for their governments and banks to borrow,” said Bilke, now at Nomura International in London. “There is also a risk that euro-area money markets could seize up again, disrupting credit flow to the euro-area economy.” The economy of the 16 nations sharing the euro will grow 0.8 percent this year, the ECB predicted in December. It contracted about 4 percent last year, according to the European Commission. The ECB will publish new forecasts after its policy meeting on March 4. Trichet ‘Confident’ “The Governing Council will, in early March, take decisions on the continued implementation of the gradual phasing out of the extraordinary liquidity measures that are not needed to the same extent as in the past,” ECB President Jean-Claude Trichet said last week. He was “confident” Greece would reduce its budget deficit to below the European Union’s limit of 3 percent of gross domestic product by 2012. Concerns about Greece’s ability to cut the deficit from almost 13 percent of GDP are spreading to the euro region as a whole as investors speculate about a possible default and even a break-up of the currency union. As the cost of insurance against Greek, Spanish and Portuguese sovereign defaults last week rose to a record, European stocks posted the biggest weekly slump in 11 months and the euro plunged to an eight-month low. ‘Bank Panic’ “Plenty of European banks have stuffed their balance sheets with Greek debt,” said Peter Vanden Houte , an economist at ING Group in Brussels. “If they did default, it would create a new round of bank panic.” Eric Nielsen , chief European economist at Goldman Sachs International in London, said Greece is in a worse situation than Spain and Portugal and its impact on market confidence should be limited. “If we are wrong” and “contagion from Greece engulfs other countries, then up to 20 to 30 percent of euro-zone GDP could be under severe stress,” Nielsen wrote in a note to clients this week. “Were a major financial instability event to develop, we would expect the ECB to pause in its exit strategy, and then, if needed, reverse course and reinstate longer-term financing.” “The ECB shouldn’t engage in any tightening at the moment,” said Julian Callow , an economist at Barclays Capital in London. Policy makers “should avoid getting egg on their face at Easter,” he said. To contact the reporter on this story: Gabi Thesing in London at gthesing@bloomberg.net ;