In the last Wednesday of November 2017, the Euro Zone saw a surprising jump of 6.1 basis points, and an additional spike of 6 basis points the following day.
Eonia is a term that refers to the interest rate for overnight loans between European banks. It is the effective overnight reference rate for the euro, calculated as a weighted average of all "overnight unsecured lending transactions in the interbank market, undertaken in the E.U. and European Free Trade Association countries. Eonia is calculated by the European Money Markets Institute.A rise in Eonia generally indicates banks' increased reluctance to lend funds amongst each other, with potential causes including a bank experiencing difficulties with meeting its commitments. Possible causes for this recent difficulty include a change in the European Central Bank's benchmark rate, or funding stress among the banks. This past Friday, Eonia dropped by 5 basis points, erasing most of Thursday's increase.
Upon seeing the rise in Eonia, many traders initially believed that it was an indicator of a deep problem in one corner of Europe's financial plumbing. Others believed that it was the product of a technical glitch, instead of a crisis warning, but this was soon shown not to be true. Immediately after, the money markets experienced a "heavy selling of futures contracts." Futures are financial instruments with high liquidity and short maturities. On Thursday, a record-setting exchange of December 2017 three-month Euribor futures contracts were traded. Eonia's rates are typically fixed to rise at the end of each month or year, on the last trading day, but the jumps in question were much more pronounced than the usual end-of-month spikes.
Experts believe that Eonia's spike may have been caused by the excess liquidity injected into the market by Greece's second largest lender, the National Bank of Greece SA. Alternative explanations say the spike may have been caused by a possible year-end funding squeeze by certain lenders, or else due to the demand related to Greece's recent bond swap.
