Forget EURIBOR And Basis-Swaps; EUREPO Curve Inversion Signals Major European Funding Stress

Tyler Durden's picture

It would appear that one-by-one the open-market indications of stress in European funding markets are manipulated to the point of worthlessness. As the provision of unsecured lending is for all intent and purpose finished in Europe, LIBOR is a mirage and even cross-currency basis-swaps (though modestly margined) have lost their 'signal' as MRO/LTRO reduced the term-funding need. However, as recently highlighted by @SoberLook, the EUREPO curve - which measures how much banks have to pay to borrow, when pledging or repo-ing assets, for loans - is not only un-manipulated as of yet but is flashing very bright warning signals that all is absolutely not well in European bank liquidity. The 'signal' that is clear is the inversion of this curve, which means simply that it is significantly more expensive to repo (borrow) in the ultra-short-term than for a much longer-term. This is likely due to the banks' need to fund deposit outflows, thus requiring the banks to 'find' that cash (by 'lending' their assets as security for the loan). The loss from the counterparty bank seizing your collateral if it went broke is far higher over a longer-period and thus there is a very strong preference to only repo overnight relative to 3 months, for instance. This repo curve inversion signals a total lack of trust among European banks (in even the shortest of tenor), no belief in short-term 'bailout effects' lasting more than weeks,  as well as a huge demand for cash (repo) that suggests deposit outflows remain very active.

The following charts shows the gradual inversion of the EUREPO curve from its 'normal' upward-sloping levels of 3/28 to its massively inverted shape currently...


...and over time it is clear that the shortest-end of the repo curve (overnight lending - solid green) has become - in the last few weeks - the most in demand relative to the rest of the short-end of the curve (1 month repo - dashed green).

While these levels are indeed indicative of funding stress they are not at 'catastrophe' levels yet though the acceleration of the inversion is very worrisome...

And as a reminder EURIBOR (unsecured lending) is a fallacy and the levels are simply not real (providing no stress signal)...

...and USD term funding needs (via the EUR-USD cross-currency basis swap market) has been 'mitigated/manipulated' by Fed swap lines and LTRO/MRO (making it worthless as a signal of stress unless it begins to seriously crash again)...

...though mid-term basis-swaps (post LTRO) show some signal, it is the short-term liquidity needs of banks that is the concern and the EUREPO curve is where to look for any signs of further stress or easing (especially when considering the +/-5% swings in stock prices among European banks currently).

Charts: Bloomberg

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xtop23's picture

Why worry they'll all be rating themselves AAA soon. Moody's, Egan, et al be damned.

That should solve everything.

BlackGoldTexasTea's picture

Maybe Zombie Apocalypse is actually referring to all the zombie banks finally failing.

Tirpitz's picture

Refinancing drying up? L E H M A N letters written in bold type all over the wall? Can't be, five years after the banks have learned their lesson(s)...

Go Tribe's picture

Please cut back on all the doomsday headlines. Just tell me when to load my gun and get the kids inside, just that one headline.

LongBalls's picture

Time for me to withdraw more cash. I like the European style.

GtownSLV's picture

None of this is a problem because Spain and Italy are getting bailed out to the tune of 500 billion euros. Really.... at least now we "Know" Itlay needs a bailout...




Tirpitz's picture

... all the while nobody knows where all that money will be coming from.

earleflorida's picture

private shadow banks surfacing --- trillions to lose if they don't get involved --- no one can hide from this 'tropic-of-cancer' financial depression --- sink or swim for all involved

andrewp111's picture

That is just a temporary kick the can move by Germany to give Ze Germans time to print up New Reichsmarks so they can exit the Euro. Then the Euro will be left to the Italians, Spanish, Portugese, Frogs,  and Greeks, who will be freed to print Euros to infinity and beyond. The Euro will become the Drachma.

long-shorty's picture

the thing that is at 0.17% now that we are all supposed to freak out about was above 1.5% at one point in 2011. I will choose to not freak out (about this particular thing); the situation as a whole is still pretty crappy.

Tirpitz's picture

The way I see it, it ain't so much about the absolute rates, but rather about the inversion of the rate curve. For the banks, which refinance(d) themselves on the short end, to hand out loans and speculate on the long end, this becomes suicidal. Time to open a bottle...

chump666's picture

Excellent article ZH

holdbuysell's picture

Isn't margin interest in brokerage/trading accounts based on LIBOR? Of course, so are other rates.

That buy equities? And other financial instruments?

Just sayin'....

FoodStampPrez's picture

The 10 year UST is at 1.6% and people genuinely believe shit is going to hit the fan here soon...seriously? 

Element's picture

Sorry, I saw your avatar and reflexively hit the red arrow at least half a dozen times before I realised what was happening, very sorry.


BTW, this was interesting:


Arkadaba's picture

Just watching the news (in Canada) and a brief report on the G20 statement on the Euro crisis: "We support the intention to consider concrete steps ..." WTF? 

Arkadaba's picture

The language is so lukewarm and vague - trying to figure out the agenda - letting Euroland go down?

sosoome's picture

It means they're gonna do something decisive. They just don't know what it is yet.

TruthInSunshine's picture

G20 Joint Statement:


We fully support an attempt to come to an agreement, to implement something that will be a net postive economic catalyst, while also taking into account the relative positions, socially, economically and politically, of each member state represented here, and the limits created by such factors, at some point in the future.


There's nothing they can do and their only attempted solution so far has been to ask German citizens and those of a few other northern european countries to commit economic and fiscal suicide (as well as their future offspring) in order to bail out the financial/banking parasites that are loaded to the gills with the sovereign debt of the PIIGS+U.K.

If Bernanke hadn't kicked the can by throwing trillions into the coffers of the well connected TBTF best friends forever of Geithner and the New York Branch of the Federal Reserve, and had instead let the forest fire clear the scrub, taking the diseased portions of the economy out, there'd be fertile, rich soil by now from which real, genuine and sustainable economic activity (the kind that creates many jobs and well paying jobs) would have taken root.

Arkadaba's picture

Yep! I agree there is nothing they can do.

But am wondering about the timing of the G20 admitting they can't do shit.  First time the PTB have even hinted that they don't have all the magic cards.

BlandJoe24's picture

Thanks Tyler.  Do you have a link so we can keep checking on an updated EUREPO curve chart?

mspgrandi's picture

Well if you havent Bloomberg is a bit tricky.

Anyway, I like the rationale of Tyler explanation, however just checked historical levels for the EUREPO curve on Bloomberg and i can say that this is not a strange situation at all, curve invert and revert fairly frequent and there is nt a clear link with the Euro crisis (i.e CDS levels, or Xccy levels etc.)


So i would not pay too much attention to this. Market is too illiquid to call

BlandJoe24's picture

thanks for doing the research and sharing your findings

chump666's picture

Asia is pricing out QE3, Yen. Thoughts?

Dr. Engali's picture

There will be no QE until August at the earliest.

realbg's picture

How do you explain the REDUCED stress level in the long-end EUREPO? 

What reason is there for EUREPO to DROP from over 0.17% on March 28 to  0.09% on June 19?

I agree inversion signals high demand for short-term repo market, but maybe we are focusing too narrowly?

slewie the pi-rat's picture

the bear shit in the woods?

ZIRP means zirp

this is very narrow and tyler says as much:  prob ain't nuttin, honey

when marioECB announces his zombie bankstering plan, perhaps he will preface it with:  take as long as you need; we can just take a partial bank holiday...

b/c he would want to prevent a deepening crisis and prevent irreversible systemic damage aka a TBTF fails

this isn't a game;   it is a real house of cards  L0L!!!

Alejandrito's picture

There are many signs of tensions in the euro area. The interbank market closed to many countries, tensions in debt issues in Spain, Greece, Italy, even France.

But the most striking is the perception of citizenship that is not the same one euro in Spain that a euro in Germany, just look at this chart:

Tic tock's picture

2 cents;, Fed announces mini-QE, Friday night announces Gold reserves will be re-valued, Wednesday announces move to Gold-backed collateral requirement.

alfanaught's picture

Interestingly, I got this mail minutes ago from ING Belgium:

Vous quittez l'Europe pendant vos vacances ?

Dans ce cas, souvenez-vous qu'il n'est plus possible d'utiliser Maestro en dehors de l'Europe (vous trouverezicila liste des pays où Maestro est encore accepté). Pour pouvoir utiliser Maestro partout dans le monde, vous devez demander une autorisation exceptionnelle auprès de votre agence. Pour cela, convenez d'un rendez-vous
Pour vos paiements et achats en Europe, rien ne change : vous effectuez ces paiements comme vous en avez l'habitude, c'est-à-dire simplement et en toute sécurité.   Nous vous souhaitons d'ores et déjà d'excellentes vacances,

Avec nos sincères salutations,  

Inge Ampe
Directeur du Marketing

Rough Translation:

During your holidays Maestro is only available in a restricted list of European Countries. Should you wish to use your Maestro Card outside of these countries you have to ask special authorisation in your bank agency

Capital controls anyone?

falak pema's picture

you mean you wouldn't trust him with your wife for one night at the Copacabana, let alone a three month stint, when you are absent???


Speedy Gonzales is the trade name of all bankstas on a liquidity spree!

Never remove your finger from there, even to scratch your nose....

TrainWreck1's picture

The life of Eurepo man is always intense.

Anonym's picture

Erm, this article makes no sense whatsoever.  Firstly, Eurepo rates are meaningless in a world where every specific type of collateral has a life of its own.  Secondly, the Eurepo fixing was meaningless even during the best of times, since people don't really trade very long-dated term repos and never have.  Thirdly, the interpretation of the repo rate in the article is flawed.  Finally, the EONIA curve is also inverted and all of these curves aren't signalling any sort of stress (EURIBOR/EONIA, which is a proper stress indicator, is near all-time lows).  What they're signalling is a pricing of an ECB depo rate cut.  


All this stuff is pretty basic and it's rather shocking to see articles that are full of such ignorance and bias.