LIBOR fixings are the basis for an estimated $300 trillion ($300,000 billion) contracts globally.
The impacts of LIBOR movements are a function of the time of the stress and duration of the contracts and resets. I won't pretend to have any idea what the average LIBOR denominated debt reset is, but here is a crude tool to estimate the damage so far.
Using the simple tool above, we arrive at an extremely crude estimate of $730b in "damages" from the credit hole of 08. Download crudetool.xls
In order to estimate the impact, I have calculated the value of a basis point per day of an "elevated" LIBOR. I use for illustrative purposes the TED spread from Bloomberg as indicator of damages above historical norms. I would be interested in hearing from others about ways to measure "excess systemic stress and damages"
Here is the ted spread for the last 3 months and 5 years to put things perspective.
Source: Bloomberg
If the TED spread declines at the same rate it went above a "normal" spread of roughly 20-30 bps, assuming the excess is credit damage, then the total LIBOR damage will be in excess of $1.5 trillion. The TED spread is a social phenomonen like all markets. Thus not modellable(my word) and obviously in statistical fantasy land (+6 Stdev) in terms of spreads right now.
Whatever color you want to call it, this Swan is getting costlier by the day. A little hint to equity traders and investors, stop watching the equity indexes like the DOW and S&P etc. they are symptoms. Credit stress is the disease, until you see the commercial paper market flowing again, the equity index fluctuations are just noise looking for a pundit justifier (high frequency historical revisionism).
Watch this S&P commercial paper index it is more important than a few hundred dow points jumping about. Don't tell CNBC, and Fox business news, they like their Crameresque amped audiences glued to the ticker and pointless minute by minute squawk of it all. WWF finance for the masses.
