Europe's Bond Market Time Bomb

It's a bad start to 2017 for the European Central Bank. The collateral freeze that plagued the 5 trillion-euro ($5.2 trillion) securities lending market at the end of last year is still very much with us, and in fact has got worse.

It's not as if it didn't try. At their Dec. 8 meeting policy makers took steps to unblock the piping of Europe's financial system by tackling an extreme shortage of the short-dated bonds that firms can use as collateral in repurchase agreements. These deals operate like high-quality loans, whose proceeds are used for activities such as financing the purchase of other securities. Without a properly functioning repo market a range of other everyday activities, such as bidding at bond auctions and hedging underwriting risk, will grind to a halt.