The chart below demonstrates that while concerns about Libor are gaining steam, a far more dangerous situation has developed in the Euro Commercial Paper (top tier) market, where rates have surged far more in the past week than even compared to Euro Libor or Euribor. As those who were alive in the days after Lehman will recall, the freezing up of the Commercial Paper market was one of the primary reasons for the Fed's creation of the Commercial Paper emergency liquidity funding facility (CPFF). If the CP market once again dies, or, as it is better known in polite circles, "locks up" it will once again set off the avalanche of locked up credit markets initially for financial and other IG companies, and shortly thereafter spread to all other segments of the market. Should the CP rates continue rising without moderation, look for European credit markets to break soon enough.
Furthermore, as the US dealer commercial paper 30 Day rates show, also on a steady rise, it is likely that none other than money markets are now shunning financial Commercial Paper, precisely in the same suicide spiral that led to a run on the money market on September 19, 2008, once CPs locked up, and eventually led to a run on MMs themselves. The paper we posted yesterday about a massive run on the tri-party repo market may prove oddly prophetic.
h/t credit trader