Melancholia is the new movie by Lars von Trier. As a planet moves toward an apocalyptic collision with Earth, a woman dealing with numbing depression taps into a source of clarity and empowerment. I could not stop thinking of the LIBOR panel when watching this moving sci-fi drama.
The glacial advance of the dollar LIBOR set pales in comparison to Euro funding but may be far more telling. The standard coverage revolves around the obvious capital threat to the banks in the panel as national balance sheets deteriorate. The shift may be more important than other crisis spikes as a new, wider equilibrium is established. The false dawn of 2010 was predicated on returning to spread metrics that reflected the credit super cycle myth. Put simply, is the present 34bp spread over FF a signal of Armageddon or an empowering embrace of a harsh but new reality?
The hope that relationships return to prior tightness is high. Some of us are operating without these pedestrian desires. The socialization of credit, although not TBTF, has ended. The Great Differentiation is in full violent bloom. That spreads are widening is not as Earth shattering as our belief that they should not return to where they were. TED spreads (out in dollars and accelerating in Euros) are not in crisis when wider. They promote crisis when artificially narrow. The situation is sketchy right now as most view change with dread. Embrace the melancholy and you will not be shocked by the outcome.