LONDON - This month’s dramatic selloff in financial markets is causing ructions in vital funding markets that keep money flowing between banks and companies and underpin anything from global trade to corporate cashflow.

In an eerie throwback to the dark days of the 2008 financial crisis when credit markets froze, the price banks and companies are willing to pay to access U.S. dollars has surged as coronavirus panic has taken hold. Banks are now charging more to lend to each other than they were last week.

The following explains how these esoteric funding markets work, why stresses in the financial architecture are emerging, and what can be done to resolve them.

Market ‘liquidity’ is the ease with which you can buy and sell a financial asset. In normal times, investors will hold a range of securities from hard-to-sell corporate loans to highly liquid government bonds like U.S. Treasuries or dollar cash.

When markets suffer dramatic price falls as we have seen this month, investors dump riskier assets and seek safety in the most liquid places that will hold their value and be exchanged quickly.

The same is true for companies. With economies set to contract and revenues shrinking as the spread of the coronavirus dampens activity and disrupts supply chains, businesses short of cash will seek to draw down loan facilities quickly or clamor for safe assets as they ride out the storm.

Yet the dash for liquidity can cause major disruptions.

Traders in the U.S. Treasury market, typically one of the world’s most liquid markets, have at times this week found it difficult to trade, a highly unusual scenario that reflects the scale of the dislocations.

That illiquidity can arise because of duration mismatches, i.e. because leveraged investors would borrow in these markets and invest them in relatively higher yielding bonds such as U.S. government debt.

Though these bonds mature over years, they are funded by cash raised from overnight markets and any increase in borrowing costs would force them to unwind these transactions rapidly, affecting market liquidity.

Spreads on three-month euro-dollar EURCBS3M=ICAP and dollar-yen JPYCBS3M=ICAP swap spreads - gauges for how much premium non-U.S. borrowers are prepared to pay to get dollars - on Thursday hit their widest since 2017.