At the ECB headquarters in Frankfurt - Bloomberg
At the ECB headquarters in Frankfurt. Photo by Bloomberg
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Something strange happened in Europe on Tuesday, stranger than most of the strange things that have happened during the sovereign debt crisis.

Someone in Europe took out the trash. Almost immediately, he realized he'd made a mistake. If anybody saw Europe taking out the trash, this particular trash, they'd realize Europe was sitting on a reeking pile of junk that no landfill could hold.

It all started with a largely predictable move by Standard & Poor's: it downgraded Greece's bonds to "selective default." The reason was the debt restructuring Greece is hashing out. Creditors, including private bondholders, stand to lose 70% of the loans they extended to Greece.

The downgrade propelled the European Central Bank to declare that Greek bonds could no longer serve as collateral for loans. With this, the bank opened the lid on the trash can and let the stench out.

With that move the ECB, one of the three pillars of Europe's rescue efforts, was saying (not in so many words ) that it refused to risk losing money if Greece didn't repay the loans it was taking from the bank. Not on so many words, it was saying that Greek bonds are a bad gamble. The collateral - in a word - stinks.

That prompted a metaphoric howl by rank and file investors: Central bank! You have printing machines, but we don't! You're saving yourself but we're supposed to roll over and accept the risk of loss.

But no, that isn't what the ECB actually meant. Greek bonds are on the bench, the bank explained. Once the second bailout pledged to Greece (after Greece humiliated itself, crawling on its belly with its face in the dust ) is delivered (if it ever is ), the ECB will get guarantees covering 35 billion euros from its partners in the bailout, covering any Greek bonds that do serve as collateral backing loans by the ECB.

If your head hasn't begun to spin by now, well done. The Greeks certainly got the heebee-jeebies because the aforementioned guarantees will be delivered (if they are indeed delivered ) only in mid-March, but their bonds have been suspended from collateral status as of Tuesday.

What that means is that any bank wanting to borrow from the ECB based on Greek bonds as collateral will be rejected. Therefore, banks heavily laden with Greek debt could run into a liquidity crunch and collapse.

But that isn't at all what the ECB meant to happen. There are Greek banks with piles of Greek debt the size of Jardim Gramacho, the world's largest landfill, and not much else - which means the ECB decision was a death sentence. How embarrassing - that very day the ECB started its second round of three-year, 1% interest loans to EU banks but now the Greek banks can't use it. Drat. What to do?

So the ECB looked around and noticed the national central banks with no real monetary authority. "Them," it decided. "Let them help the Greek banks with emergency liquidity assistance until the 35 billion euros come through." Once the billions came through it could resume accepting garbage as collateral because it would be safe from losses, the ECB figured to itself.

So the ECB stuffed local governments with bridge loans - an inelegant, strange and amateurish solution but mainly a move smelling of improvisation by the the world's second most important monetary establishment after the Fed.

This story of the ECB and the Greek bonds made no waves. The markets preferred to continue their momentum and hope the three-year cheap-loan fire hose that the ECB wielded will wash the filth off the euro zone.

It might not seem consequential, but when you add another story - the referendum Ireland announced on the new EU treaty - we get two destructive elements for European unity.

If Ireland votes against the new treaty, which is supposed to be Europe's road out of the crisis, the euro zone will fall apart. It would be ironic if the Irish, who so obediently accepted austerity and budget cuts, unlike the militant Greeks, were the ones to burn down the European house.