It seems the US can’t seem to catch a break… and here in Europe we’re so oblivious that we think their problems won’t affect us just as much, if not more so. The latest red warning light to come on (one of the few that were still off) is that concerning the price of lower-grade non-financial commercial paper: the so-called A2/P2 CP (Commercial Paper).
Well, just as the Fed is in the midst of planning a massive buy-up of long-term Treasuries to create an artificial ceiling on prices, things are going awry – specifically, the spreads on A2/P2 commercial paper relative to AA-rated debt. But it’s not just that they’re widening; they’ve shot up to unprecedented astronomical limits, above 580 basis points one year out. You can view these spreads at this page from the Fed. Not only does this harm the companies themselves, which sell their bonds at exorbitant prices to the detriment of their balance sheets, but it is also potentially dangerous for the investors who buy those bonds. This risk is, of course, reflected in the form of a massive spread and contributes to the tightening of credit conditions. As we often say, this imbalance will tend to rebalance itself, and God willing, this will take the form of a narrowing of the spread (albeit in a way that is also artificial) rather than rising due to widespread defaults. What we believe is inevitable is that this pressure on commercial paper will spread to Europe, and that we will see spreads widen there as well.
All of this is nothing more than the social consequences of the tsunami that we are beginning to see something we might not immediately notice on our beaches, but which has been caused by the financial and credit crisis we have been experiencing since the summer of 2007.
Commercial paper distressed, ... is nothing more than a reflection of the global financial situation at company level, and therefore also at investor level, and consequently at workplace level and in terms of unemployment figures. We are not just talking about redundancy schemes, but also about closures that result in a 100% of unemployed people.
Many initial steps are being taken, and the effort will be historic, but the problem we have got ourselves into is colossal. The pressure is so intense that, despite attempts to keep the vital financial fundamentals under control, in many places...manhole covers are being hurled through the air with unprecedented force, such as the spread on that A2/P2 CP. Let’s hope they serve as a kind of safety valve, although at present they are merely symptoms of the fact that we're standing on a volcano. And the following graph could well be the seismogram of the first eruption, which took place in August 2007.
A quick glance at this chart of commercial paper yields—which are traditionally linked to the official yield curve—reveals some shocking evidence. And the final quarter of 2008 is proving to be even more terrifying. Only politicians, the wicked or the foolish have, until recently, failed to realise that the world changed 16 months ago. Crystal clear, isn't it?.