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ESTR, We Have a Problem

Published on

September 3, 2025

Written by

Arne Petimezas

Director Research

In today's Money Market Update I present my latest forecasts for the spreads of ESTR, GC repo, and Euribor 3-month and 6-month. In the case of the former it's the spread with the ECB deposit rate. And in the case of the latter the spread with ESTR OIS;
Spread increases are still gradual - bank reserves (the key determinant in the models) are still relatively ample, even in member states like Italy and France. We're still in the normalization phase, with spreads returning to levels on the eve of the pandemic:
Of course, events can always intrude. In the case of the Euro Area, that's always political risk and not ECB mismanagement. However, over the past several months the liquidity situation of French banks hasn't deteriorated - reserve declines are in line with expectations. Furthermore, repo borrowing by French banks has stabilized:
A key takeaway is that a reserve ratio of three percent is the lowest comfortable ratio for Italian banks. That's higher than the two percent Italian banks reported before the crisis, but lower than four percent that has been mentioned in scholarly research;
There is a problem with ESTR. Its spread increases are lagging that of the other money market benchmarks. I have no good explanation for the almost stale settlements of ESTR. What I can say, is that it's not a good bellwether for money market conditions. That speaks volumes about the importance of the secured market. And it should lead to some soul-searching by our friendly overlords in that fancy tower in Frankfurt.