More LIBOR Fun

LIBOR rates took another sharp decline this morning, the overnight rate is down to 1.58% and both the 1-month and 3-month rates fell 22 basis points. Granted, there's still a lot further to fall, but at least for now the credit emergency does appear to be over.

Now the next emergency begins. Hyper-inflation? Credit card defaults exploding? There are still plenty of shoes left to drop.

So there is now a growing chorus saying that the stock market has bottomed out, that is oversold and this is the time to buy. The problem is that all the possible good news about policy makers doing everything necessary to avoid a meltdown were already priced in the 10% jump in global equities on Monday while, from now on macro news, earnings news for financial and non-financial firms and additional surprises from systemically important components of the global financial system, will mostly surprise on the downside with considerable further downside risks to financial markets. These systemic financial risks include: a major surge in corporate defaults rates and fall in recovery rates as the recession becomes severe thus leading to a further widening of credit spreads; the risk of a CDS market blowout as corporate defaults start to spike; the collapse of hundreds of hedge funds that, while being small individually, will have systemic effects as hundreds of small funds make the size of a few LTCMs in terms of their common deleveraging and selling assets in illiquid markets (as the Wednesday equity meltdown showed); the rising troubles of many insurance companies; a slow motion refinancing and insolvency crisis for many toxic LBOs once covenant-lite clauses and PIK toggles effects fizzle out; the risk that other systemically important financial institutions are insolvent and in need of expensive rescue programs while the $250 bn of recap of banks is way insufficient to deal with their needs; the ongoing process of deleveraging in illiquid financial markets that will continue the vicious circle of falling asset prices, margin calls, further deleveraging and further sales in illiquid markets that continues the cascading fall in asset prices; further downside risks to housing and to home prices pushing over 20 million households into negative equity by 2009; the risk that some significant emerging market economies and some advanced ones too (Iceland) will experience a severe financial crisis.

We're nowhere near done with this mess. Nowhere near.