Repo markets could face repricing chaos
The huge but poorly understood repurchase-loan market is the oil that greases the banking system, and a US default or even a downgrade would affect liquidity, but no one knows to what extent.
If the United States commits hari-kari next week and defaults on its debt, whatever market mayhem ensues will affect the $10 trillion repurchase-loan market.
This is the market in which financial institutions engage in overnight loans among one another, technically selling collateral to lenders with a promise to buy it back the next day. In reality the lender usually agrees for its cash or securities to be rolled over. This liquidity is used to finance everything from prop trading to …
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