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Approaching end of LIBOR – Need for new RFR Liquidity

The London Inter-Bank Offer Rate (LIBOR) reference rate has announced its retirement and 31st December, 2021 will be the last day of its service. It is estimated that contracts worth $350 trillion will be impacted by this transition. Financial institutions are now forced to repaper their contracts to remove LIBOR references. Alternative Reference Rates (RFR) such as SONIA and SOFR have the spotlight now because people are actively looking for the transition to happen smoothly and Alternative Reference Rate Committee (ARRC), the working group under Federal Reserve will help in this regard.

LIBOR is calculated over seven different tenors, across five different currencies, it is used in loans, bonds, markets, derivatives and thus is a global benchmark reference rate. LIBOR is an indicator of liquidity when the market is volatile, it is forward looking in nature. The new RFR should be able to produce forward-looking interest periods giving the market a sense of certainty where one knows the interest rate for an interest period at the beginning of an interest period. RFRs becoming more predictable to financial institutions will become the key to indicate liquidity in RFR markets. As more institutions use RFRs, their liquidity will grow leading to diminished LIBOR liquidity, just like a see-saw. RFRs are based on real transactions and use references from actual overnight trade data making it more robust and risk free. And that is why RFRs are priced without a credit risk premium like in the case of LIBOR.

Since it is now confirmed that the days with LIBOR is numbered, any delay in transition from LIBOR will lead to a hefty loss. The market should adopt the RFR compounded in arrears approach instead of waiting for a true term RFR.  This approach should be the new norm in bilateral and syndicated loan markets. The importance of liquidity in RFRs by using SONIA and SOFR and the stability it offers in term rates, gives hope to financial institutions to produce more term rates. We can thus conclude that the transition from LIBOR to RFR will not be as risky and volatile since RFRs provides the necessary stability to liquidity in market rates.

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Finance

Euro zone ministers expect inflation to slow in 2022

The acceleration of euro zone inflation, driven energy prices, is mostly temporary. Then the price growth will slow down again. The euro zone finance ministers agreed that, that too the next year as forecasted by the European Central Bank and the European Commission.

Paschal Donohoe, chaired the talks of the ministers in Luxembourg. In a news conference he said that there was also agreement that the inflation spike was not an argument against the transition to renewable sources of energy. This is under the EU’s ambitious plan of reducing CO2 emissions to zero by the year 2050.

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Finance

Under new rules, borrowing for investment sensible

British finance minister Rishi Sunak said that the government borrowing to fund investment was a sensible thing. This is to allow under new fiscal rules that he is likely to announce, unlike borrowing for day-to-day spending. He said that borrowing for capital investment that is going to drive up their growth is probably a sensible thing for them. And that too particularly in an environment of slightly lower interest rate. Sunak stated this in an event on the sidelines of the annual conference of Britain’s ruling Conservative Party. This event was organized by the Taxpayers’ Alliance advocacy group. Sunak stated in that event, that borrowing for more day-to-day spending is probably less something that you would want to have as part of your framework.

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Finance

IMF board to interview Georgieva-sources

The International Monetary Fund’s executive board is going to interview Managing Director Kristalina Georgieva. This is regarding that; its reviews claims that she pressured World Bank staff to alter data to favor China in her previous role. Board members were initially expected to meet with Georgieva. But spent their time working on other regular business matters.

The board members spent hours for questioning lawyers from the WilmerHale firm. This is about their World Bank investigation report which alleged that Georgieva, as the bank‘s CEO applied undue pressure on staff, to alter data in the flagship “Doing Business” report to benefit China. Then, an IMF spokesperson said that the IMF board remains committed to a thorough, objective, and timely review of the matter. Georgieva has strongly denied the accusations.

The upcoming interviews could prove pivotal in either increasing support for Georgieva. This is with many IMF shareholders are keen to wrap up the board’s deliberations on the matter. The fund’s most influential member governments, including the top shareholder the United States, have withheld public judgment. The World Bank tasked WilmerHale with investigating the “Doing Business” data irregularities identified in 2020. The law firm’s report contends Georgieva. The former World Bank President Jim Yong Kim’s office pressured staff to manipulate data so that the China’s global ranking in the “Doing Business 2018” study of investment climates rose to 78th from 85th.

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