To improve their public finances these countries are now implementing strict budget tightening, which is necessary to attain a stable long-term development in public finances. But at the same time, the budget constraints will in the short term subdue GDP growth, particularly in the euro area. (Figure: Interest rate differential against Germany). Concerns over losses in the banking sector The problems have also affected the banking sector. Banks normally include government securities among their assets, which means that they risk suffering losses if the countries to which they are exposed have problems managing their debt. As the public finances problems became increasingly acute in several areas during the spring, the market focused more on the exposures of the European banks to the countries with the greatest problems. The uncertainty over which banks risked making losses pushed up risk premiums on interbank loans. This was reflected in the basis spread, that is, the difference between the interbank rate and the expected policy rate. During the latter part of April and May the basis spreads in the euro market and the United States rose. (Figure: Basis spread). BIS Review 109/2010  3  One measure of how the financial markets assess banks’ credit ratings is the premiums paid for what are known as CDS – credit default swaps 1. High premiums here entail a high credit risk. During the spring the CDS premiums for the European banks rose, particularly in Greece and Portugal, but also in Spain and Italy.
in mortgages); the associated transactions produce a swap curve, which serves as a benchmark for pricing and valuing bonds and loans. To date, however, trading – and hence liquidity – in SARON swaps has been low. This will change once more SARON-based cash products become available. The successful transitioning away from Libor therefore hinges on the development of such products. Page 2/6  Berne, 12 December 2019 Andréa M. Maechler  News conference  In order for SARON to be used as the reference rate for cash products, a longer-term interest rate must be calculated from the daily rate. As early as 2018, the NWG recommended various options for calculating an average interest rate based on realised SARON values. This approach, known as compounding, is also gaining traction abroad. A wide range of options for calculating such average rates has been proposed and evaluated. At its latest meeting, the NWG was more specific and narrowed down its set of recommended options. 1 As a result, market participants can now begin embedding the compounding approach in products such as mortgages. In addition to new SARON-based cash products, solutions must be found for existing Liborbased products. Ideally, these will be replaced by new, SARON-based contracts. At the very least, the existing contracts must be furnished with fallback clauses, which will come into effect when Libor is no longer available as a reference rate. I should stress that it is evident that the Swiss franc Libor will cease to exist.