ECB bails out a bailout

In Europe this week financial leaders must be asking themselves, "What have wedone now?"

Considering the possibility that a few collaborative members of the economic brain trust on the continent have created, unwittingly, a monster, the European Central Bank went into bailout mode Wednesday, loaning $713 billion to rescue its own rescue effort, so to speak.

The central bank, essentially, had to bail out its own bailout.

A major credit rating agency declared Greek bonds to be in "selective default" -- that meant those bonds could no longer be used as collateral at central banks -- and private banks use government bonds for collateral every day. Billions of dollars in loans, albeit generous, low-interest loans, had Greek bonds to back them up. But the European Union, the International Monetary Fund and the ECB had forced Greece to negotiate a substantial haircut or devaluation with private bondholders that was called voluntary -- which in this case was a word that meant twisting their arms, but not writing that down.

See where this is going? The final kicker is that the ECB, as one member of the so-called troika -- exempted itself from the same devaluation process. The troika stipulated a devaluation of at least 50 percent, leaving the ECB's holdings out of the process. Hence, the word "selective." ECB one; private bondholders zero.

That brings the story back to the $713 billion in low-interest loans that banks took out to cover other loans with collateral that had evaporated.

It's as if the troika said, "OK, banks, empty your pockets. Put it all on the table here, and we'll see where we stand."

In fact, the $713 billion was slightly more than was doled out in three-year loans in December.

About 800 European banks participated in December's program, assuring investors that banks would remain liquid even with further jolts in the financial system, The New York Times reported Wednesday.

The Wall Street Journal said about $200 billion in short-term central bank loans were coming due, which means the liquidity provided this week is $513 billion, not $713 billion.

All good, right? Equilibrium restored. But what do the credit rating agencies think?

For small banks, central bank loans are "merely stalling recognition of fundamental weaknesses," the Journal quoted Bridget Gandy, co-director of European banking at Fitch Ratings, as saying.

Economic buzz kill. Duly noted.

In international markets Wednesday, the Nikkei 225 index in Japan was flat, rising 0.01 percent, while the Shanghai composite index in China lost 0.95 percent. The Hang Seng index in Hong Kong rose 0.52 percent, while the Sensex in India rose 0.12 percent.

The S&P;/ASX 200 in Australia climbed 0.84 percent.

In midday trading in Europe, the FTSE 100 index in Britain dropped 0.07 percent, while the DAX 30 in Germany gained 0.5 percent. The CAC 40 in France rose 0.41 percent, while the Stoxx Europe 600 added 0.34 percent.