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 an 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 in 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 phenomenon like all markets. It's therefore 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., as they are mere symptoms. Credit stress is the disease, and 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. That's WWF finance for the masses.
