Neither liquid nor solid

摘要

Will liquidity be the cause of the next great financial crisis? Recent problems in the obscure-sounding, but highly important, repo market may hint at the trouble to come. A repo, or repurchase agreement, is a short-term loan. One party sells a security to another, in return for cash, and agrees to buy it back at a later date for a higher price. The difference between the two prices is equivalent to an interest payment. The security, which is usually short-term Treasury debt, acts as collateral for the loan. Repos are the oil that greases the wheels of the financial system, allowing financial institutions to manage their cash needs. Global repo turnover is estimated at $1.6 trillion every day. In recent weeks, however, there has been a sudden surge in "fails"-trades in which parties to a repo agreement have been unable to deliver the required security (see chart). Past spikes in the fail rate have been associated with periods of market nervousness (such as Congress's tardiness in increasing the debt ceiling in 2011). But this time the markets are fairly calm.