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€STR body's gotta learn sometime

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By Burhan Khadbai, Lewis McLellan
03 Oct 2019

If the ECB wishes its new risk free rate €STR to take off in the way that its UK and US cousins have, it must learn lessons from those country’s central banks on how to promote it.

Sonia-linked borrowing has swiftly become a mainstream product in the bond market, and the US version, Sofr, is not far behind. The success is a result of the efforts of the Bank of England and the US Federal Reserve.

Although the UK loan market is still reluctant to let go of Libor, like a child who won’t let go of a security blanket it’s grown out of, the Bank of England published a report on Monday chastising it and chivvying it towards adopting Sonia.

Its efforts are gradually being rewarded. NatWest issued a loan against the Sonia benchmark in June.

New York Fed president John Williams made a speech two weeks ago scolding market participants for “sticking their metaphorical heads in the sand” and assured them that the demise of Libor is a foregone conclusion.

The European Central Bank faces an uphill struggle with the promotion of €STR, and its actions so far don’t suggest a sense of urgency, given how long it took for €STR to be published in the first place.

While the ECB has taken the bold and laudable step of pegging the old rate Eonia to the new rate €STR, Euribor will still be hanging around, much like legendary football manager Bill Shankly was said to done at Liverpool FC’s training ground long after he retired, being nothing but a huge distraction to progress.

A central bank should be the loudest voice in coaching markets to transition away from Libor. The ECB needs to speak up, or €STR could be ignored.

By Burhan Khadbai, Lewis McLellan
03 Oct 2019