Stress test in action.

This article is self-explanatory. Like most news articles it is an after-the-fact explanation as Eurodollar spreads (and some EU debt repo prices) reflected this.

Bank borrowing from ECB is out of control

By Ambrose Evans-Pritchard
Last Updated: 3:06pm BST 21/08/2008

The European Central Bank has issued the clearest warning to date that it
cannot serve as a perpetual crutch for lenders caught off-guard by the
severity of the credit crunch.

Not Wellink, the Dutch central bank chief and a major figure on the ECB
council, said that banks were becoming addicted to the liquidity window in
Frankfurt and were putting the authorities in an invidious position.

"There is a limit how long you can do this. There is a point where you take
over the market," he told Het Finacieele Dagblad, the Dutch financial daily.
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"If we see banks becoming very dependent on central banks, then we must push
them to tap other sources of funding," he said.

While he did not name the chief culprits, there are growing concerns about
the scale of ECB borrowing by small Spanish lenders and 'cajas' with heavy
exposed to the country's property crash. Dutch banks have also been hungry
clients at the ECB window.

One ECB source told The Daily Telegraph that over-reliance on the ECB funds
has become an increasingly bitter issue at the bank because the policy
amounts to a covert bail-out of lenders in southern Europe.

"Nobody dares pinpoint the country involved because as soon as we do it will
cause a market reaction and lead to a meltdown for the banks," said the
source.

This "soft bail-out" is largely underwritten by German and North European
taxpayers, though it is occurring in a surreptitious way. It has become a
neuralgic issue for the increasingly tense politics of EMU.