I have a question linked to the EURIBOR – EONIA spread (or OIS LIBOR spread).
I understand that the EURIBOR - EONIA spread is a credit risk indicator of the interbank market.
There is something I do not understand about the EONIA/OIS swap rate: We say that this rate does not incorporate any credit risk because in the EONIA swap there is no exchange of principal (unlike EURIBOR), therefore no credit risk exposure.
However, if we take the spread between 3-month EURIBOR versus the 3-month EONIA swap rate, the latter is calculated based on the compounded EONIA rate for the 3 month tenor. And the EONIA rate is the unsecured overnight lending rate (with the assumption of exchange of principal).
Therefore, by definition, the EONIA rate, just like EURIBOR, incorporates credit risk (unsecured overnight lending rate). So why would the EONIA swap rate not incorporate such credit risk if it is based on EONIA rate? Saying that the EONIA swap rate is risk free because there is no exchange of principal does not make sense to me.
Thanks for your help.