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As a consequence of the creation of the euro, the individual central banks lost their ability to print currency and become lenders of last resort to their respective financial systems. This is why the Irish, Greek and Spanish banks, among others, have been borrowing heavily from the ECB.

Like any reasonable central bank, the ECB requires collateral of - at least - allegedly high quality in order to lend money. (They do accept eurozone government paper as good quality, no matter which government.)

Although I knew that the local central banks retained the authority to lend money (after all what good is a bank without such authority), I thought their capacity to make a difference in the current crisis was severely limited by their inability to print euros.

This is why I was very surprised to discover that the Bank of Ireland (IRE) has been lending directly to the Irish banks under the "Emergency Liquidity Assistance." Not only that, but, according to figures released by the Irish Central Bank and cited by the FT, the number has been increasing quickly to reach €51.09bn as of December 31st, 2010. This, on top of €132bn lent by the ECB directly to the same banks. In case you are wondering, Irish GDP is about €170B.

The last paragraph in the FT article says:

The ELA scheme is understood to involve collateral which would not normally be acceptable to the ECB. In the case of Anglo Irish, the bank pledged the promissory notes provided by the Irish government as part of its recapitalization of the bank.

In other words, Anglo Irish gets an IOU from the Irish government, itself being on life support by the European Fund, to get a loan, from the Irish Central Bank who accounts the same promissory note as an asset (presumably without a reserve since it comes from the government) to lend them the money. Furthermore, the scheme presumably has the acquiescence from the ECB (otherwise the whole scheme would be illegal). The ECB basically allows the Irish Central Bank to print euros. At this point, I wouldn't be surprised if the IOU was either not counted on the Irish national debt or totally balanced by "assets at the Irish Central Bank" (the loan to Anglo Irish).

The guys from Enron would be proud.

Source: Irish Financial Engineering Rivals Enron's Tricks