SCENARIOS - How the ECB might signal its first steps to the exit

FRANKFURT (Reuters) - The European Central Bank is expected to give at least a rough sketch on Thursday of how it plans to start unwinding some of the emergency measures it took to prop up the euro zone economy through the global crisis.

The ECB is also expected to announce upgrades to its staff projections for 2010 economic growth after Thursday's policy meeting and analysts are eager to see inflation expectations for 2011, presented for the first time.

The 16-country bloc's central bank has cut its main refinancing rate by 325 basis points since the financial crisis intensified in September 2008. It is expected to keep the benchmark rate at its record low of 1 percent until the fourth quarter of next year, according to Reuters polls.

Following are different scenarios of what might be announced after the December 3 meeting.

- LEAVES RATES UNCHANGED

The ECB keeps its main refinancing rate at 1.0 percent and the deposit rate, which acts as a floor for money markets, at 0.25 percent.

PROBABILITY: Very high. The latest Reuters poll showed all 80 economists expected the ECB to keep rates at the current level in December.

MARKET IMPACT: No impact, given the consensus on the outcome.

- SAYS RATES APPROPRIATE

Trichet repeats that interest rates are at an appropriate level, reinforcing the consensus that rates are going to stay on hold for some time.

PROBABILITY: Very high.

MARKET IMPACT: No impact. Would support expectations the ECB will pull back liquidity before raising policy rates. Omitting this phrase would trigger speculation of a rate hike sooner than the fourth quarter of 2010 as economists currently expect.

- SAYS DEC 12-MONTH OPERATION TO BE THE LAST

Trichet gave a strong signal that this is likely in November, although he and others have also stressed no final decision has yet been taken.

PROBABILITY: Likely.

MARKET IMPACT: The move is largely priced in already. The euro could rise slightly, shorter maturity bond yields would rise and flatten the yield curve.

- SAYS RATE AT 12-MONTH REFI TO BE 1 PCT

All operations have been conducted at the main policy rate until now, and a Reuters poll of money market traders showed no change was expected. But ECB President Jean-Claude Trichet has talked of options, including adding a spread or indexing the cost of borrowing in the operation. Banks are likely to bid more strongly if the funds are cheap, and the ECB wants to avoid pushing too much liquidity to the markets.

PROBABILITY: Moderate to likely.

MARKET IMPACT: A small negative for the euro, could weaken up to 30 ticks against the dollar. Would steepen the bond yield curve with short end yields moving lower.

- ADDS A SPREAD TO 12-MONTH REFI

Adding a spread would temper demand, but also send a -- possibly unwanted -- signal that interest rates are likely to rise before the end of 2010.

PROBABILITY: Moderate to unlikely.

MARKET IMPACT: Traders see this move pushing the euro up against the dollar by maybe 30 ticks. It would also flatten the bond yield curve by lifting the front end yields.

- INDEXES 12-MONTH REFI RATE The ECB could follow the model of Sweden's Riksbank, which sets the minimum interest rate on 12-month loans at the average repo rate during the maturity of the loan plus 0.30 percentage points. The ECB could link the cost of funds to changes in its main policy rate or set a floating rate by linking the cost to a market rate such as 12-month Euribor, currently at 1.235 percent

PROBABILITY: Moderate to unlikely. While Trichet said last week all options are open, this would go against the ECB statement in May, when it said the June, September and December 12-month liquidity operations would be conducted at a fixed rate, but could include a spread.

MARKET IMPACT: Would depend largely on indexing conditions, but likely to have slight positive impact on the euro and lift shorter term bond yields. Would decrease demand at December 16 one-year tender.

- CUTS FREQUENCY OF LONG-TERM OPERATIONS

Before the crisis, the ECB conducted one long-term three-month liquidity operation a month. As the crisis intensified, the monthly calendar was boosted to include on average one extra operation over one, three, six and months, as well as the three 12-month operations. The ECB could cut extra operations in 2010 to one of each maturity per quarter.

Currently the 2010 tender operation calendar only has one long-term refinancing operation a month.

PROBABILITY: Moderate to likely. Several policymakers have said not all liquidity operations would be needed.

MARKET IMPACT: Could lift the euro slightly and flatten the yield curve by lifting shorter maturity yields. Details would determine the size of the impact.

- MAKES NO ANNOUNCEMENT ON FULL ALLOTMENT EXTENSION

The ECB has said the policy will remain in place for as long as needed, or at least "beyond the end of 2009" and does not have to decide on December 3. Policymakers have a mid-month meeting on December 17, the day after the results of the next 12-month refi are due, and it would make sense to see the size of that loan before locking themselves in to decision. They could also conceivably wait until January 14. Still, if banks are uncertain about how long unlimited funds will last, this could prompt them to borrow more in December.

PROBABILITY: Moderate to unlikely.

MARKET IMPACT: Would add to volatility in stock, bond and foreign exchange markets trying to forecast the ECB's next moves.

- EXTENDS FULL ALLOTMENT POLICY UNTIL AT LEAST END Q1

Even if the promise only covers weekly operations, this would give banks more time to adjust to the phasing out of liquidity operations.

PROBABILITY: Moderate to likely.

MARKET IMPACT: If the promise covers only shorter maturities, could lift Euribor interest rates between 3 and 12 months. Would be a slight negative for the euro.

- EXTENDS FULL ALLOTMENT POLICY UNTIL END Q2 OR LONGER

This would cover the repayment of 442 billion euros in 12-month funds on July 1, and mean banks could meet liquidity needs even if the longer-term operations are cut back. But it would keep liquidity in the banking system high.

PROBABILITY: Moderate to unlikely.

MARKET IMPACT: A negative for the euro, could steepen the bond yield curve with short-end yields falling.

- UPGRADE STAFF ECONOMIC PROJECTIONS

Economists expect the ECB staff to upgrade their economic projections for next year, but the question remains by how much. Also, markets will pay a lot of attention to 2011 inflation projections. If they are well below 2 percent, this would mean less pressure to raise interest rates.

PROBABILITY: Upgrade is likely, but Trichet is also expected to warn of uncertainties and foresee a bumpy recovery.

MARKET IMPACT: Impact would be muted since this meets analyst expectations. But a sharp hike in growth and inflation forecasts would increase rate hike expectations, the euro and stock markets would rise and bond prices would be hit.

- COMMENT ON FOREIGN EXCHANGE

Trichet travelled to China in late November to talk about European concerns regarding the Chinese yuan peg to the U.S. dollar.

PROBABILITY: Likely to say something about foreign exchange when asked, but significant change in language less likely.

MARKET IMPACT: Were he to sharpen his tone, would hit the euro and lead to a stock market rally. Analysts see muted impact in bond markets. But just repeating he supports the U.S. authorities' comments on the strong dollar would fall on deaf ears.

(Reporting by Krista Hughes and Sakari Suoninen, additional reporting by Emelia Sithole-Matarise, Jamie McGeever, Tamawa Desai and Jessica Mortimer; Editing by Andy Bruce/Ruth Pitchford)