Where to find bank stress
I have been directed towards a dramatic shift in the Eurepo curve, by Sandy Chen of Cenkos securities.
You are probably wondering what I've been drinking, given that I find this gripping.
So I had better explain.
The Eurepo curve is a chart which shows what European banks have to pay to borrow when pledging assets - or "repo-ing" - for loans.
Now what is very striking is that the interest rate for borrowing for just a day on this market or for a month is massively greater than borrowing for a year - which is not what you would expect, and was not the case in April.
As I am sure you know, interest rates are normally higher on loans for longer periods, because the conventional view is that for the lender, the risks of lending rise with the length of the loan.
So why would it be significantly cheaper for banks to borrow on the repo markets for a year than for a day (which as I say wasn't so even a month ago)?
Well, as I've been pointing out for some weeks the big threat to banks in eurozone countries perceived to be at some risk of leaving the currency union - such as Greece, Spain, Portugal, and Italy - is an outflow of deposits. And as Stephanie Flanders points out this morning, new data shows this worrying trend is accelerating.
Now, to state the bloomin' obvious, when customers instruct their banks to transfer their money elsewhere, their banks need to find the cash. They can't simply borrow it in an unsecured way from other banks, as they used to do, because that unsecured banking market shrivelled in the credit crunch of 2007-8.
That is why, as I've mentioned before, it is pointless looking at Libor and euribor interest rates for signs of banking stress, because they are semi-irrelevant markets these days.
Instead, the action is in the repo market, where credit is provided in return for assets.
But here is the important thing. In today's world, where it is impossible to borrow in an unsecured way, banks can't afford to lose the assets they pledge to other financial institutions in a repo operation.
So, in stressed market conditions, if you are a bank in need of cash, it is saner to borrow for a day or a week rather than for a year. Because over the course of a year, there is a danger that the bank that you've borrowed from - and is holding your assets as security for the loan - could go bust.
And since the assets you've pledge would be worth considerably more than the loan, that risk of the so-called counterparty collapsing isn't worth taking.
Which means there is much more demand for overnight loans on the repo market than for year-long loans. So the cost of year-long loans is much lower than for overnight loans.
Or to put it another way, the dramatic inversion of the Eurepo curve over just the past few weeks says something disturbing: banks are again fearful of becoming too financially dependent on each other, because they can't be certain which are healthy and which are living on borrowed time.