Libor will cease to exist after 2021. The consequences for debt markets are momentous. And yet the industry is burying its head in the sand. Why is this?
Like an old donkey that is past its prime, Libor staggers on towards the knacker’s yard. For almost four decades it was the reliable and doughty servant of international debt markets – the benchmark upon which all contracts were founded – but today it is but a frail interpretation of its former self. Undone by scandal - its reputational back broken – Libor quietly expires.
The plan is that by 2021 Libor will no longer exist. An interest-rate benchmark that is tracked by $370 trillion’s worth of financial products, worldwide, is about to be permanently put to sleep.
And yet international debt markets appear to be almost completely oblivious to this decline. They sail on in a kind of serene denial of Libor’s impending demise and, most importantly, there seems to be little high-profile debate about what to replace it with – never mind the deeply unnerving consequences of moving many trillions of dollars of legacy contracts off Libor over the next three years.
Here’s how one senior adviser to the Bank of England put it to me the other day: “It’s an unfortunate fact but, like an opioid epidemic, it’s hard to wean people off. Libor is pervasive. It’s a big collective effort to move off. People would rather bury their head in the sands.”
Heads in the sand
Replacing Libor is perhaps the single most important – and complex - issue to hit financial markets in a generation but, like the family’s errant uncle with a shady past, financial professionals are engaged in a kind of industry-wide omertà on the subject. Sure, there is muted talk of SONIA at the Bank of England and SOFR at the Fed but, outside the regulators, it is hard to discern any kind of detailed consideration of a future without Libor.
I’ve had direct experience of this complacency. Last September I was asked to host a round-table debate on replacements for Libor and – I josh you not – not a single person showed up. I was in a room with 170 corporate finance professionals and not one person volunteered to take part in my Libor debate. I sat alone and friendless – the physical embodiment of Libor, in fact - while people talked earnestly all around me of rising rates, overvalued assets, credit cycles, China growth, Brexit, EU banking union – anything, in fact, but Libor. Surely – I thought at the time - that is like going to a construction conference without ever once mentioning cement?
I fear that the issue is just so complex and fraught with risk that it is simply much easier to ignore the problem completely - in the vain hope it might go away. It won’t. This old donkey won’t go out without a kick or two. Best to be prepared.
Find out more about a future without Libor at this year’s Global Borrowers’ and Bond Investors’ Forum in central London on 19th and 20th June. More details of the event, and who will be speaking on our Libor panel, here.