Global Daily – ECB open to EONIA alternative

by: Fouad Mehadi , Kim Liu

Euro Money Markets: ECB takes an active role in providing an alternative to EONIA – The ECB won’t overhaul or substitute the methodology which is used to calculate the money market reference rate Euribor, according to a Bloomberg News report. As such, the central bank throws the ball back in the court of the banks and banking association EMMI (European Money Markets Institute), which should take the lead in making the reference rate more credible and robust. The ECB’s stance does not come as a surprise as ECB officials have mentioned before that the Euribor reform is a private matter and that the industry itself should take responsibility.

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The ECB’s laissez-faire stance follows the conclusion of a review on Euribor by EMMI. On 4 May 2017, EMMI published the results of its ‘Pre-Live Verification Program’, in which it collected and used recent money market data to evaluate the implications of moving away from a quote to transaction-based Euribor methodology (see our earlier daily on this topic here). Back then, EMMI concluded that it deemed it not feasible to have a ‘seamless’ change from the current quote-based methodology to a transaction-based framework. EMMI said that it would remain committed to reforming the methodology by rather focusing on a hybrid version. The ECB closely monitored the process by EMMI.

The Bloomberg article also mentions that, in contrast to its stance towards Euribor, the ECB is open to offer an alternative to Eonia, the overnight rate for unsecured lending. Such an alternative benchmark rate could substitute or exist alongside Eonia. The difference in stance is most likely due to the direct importance of Eonia for the ECB’s monetary policy transition mechanism. The exact form in which it intends to provide an alternative benchmark is unclear. We think that such an alternative reference rate could especially be valuable as a backup in times of illiquidity or adverse scenarios. Nonetheless, the ECB should be cautious in such an approach as illiquid market conditions or possible differences between the calculation methods of the current Eonia and the alternative Eonia rate, could lead to price inconsistencies. (Fouad Mehadi)

Euro Government Bonds: Doubts about whether Greece can enter bond market – In the past days multiple officials, such as Greek Prime Minister Tsipras and ESM head Regling, have suggested that Greece should soon be able to finance itself by returning to the bond market before long. Indeed, the recent debt deal, general market sentiment and the rally of Greek sovereign bonds are supportive of this belief. However, we remain very cautious and sceptical about whether Greek government could re-enter the market soon. In our view, the recent debt deal is merely kicking the so-called can down the road as the key point still remains that the Greek debt pile is far from sustainable. A recently leaked draft report by the European Commission, confirms this thought. An important signal would be the inclusion of Greek sovereign bonds to the ECB’s QE programme. Currently, Greek bonds can be used by Greek banks as collateral for monetary liquidity operations, but these bonds cannot be bought by the ECB under its QE programme, despite the waiver. However it seems that before this can be the case, the ECB itself needs reassurance of the sustainability of Greek debt. Earlier this year, ECB President Mario Draghi said to Members of European Parliament that the central bank would need to make its own debt sustainability assessment in full independence. This point was today reiterated by the ECB’s Chief economist Peter Praet. Without the ECB’s consent to take on Greek sovereign risk and the country’s debt still being unsustainable, we expect that investors will remain side-lined. Since we expect that the QE programme will be tapered as of January 2018, time is running out for Greek bonds to be included in the QE programme. This means that sooner becomes rather later. (Kim Liu)