This week the outstanding commercial paper posted the biggest weekly decline since August (-$54bln). Nobody wants to have anything in the books at the midnight of Dec 31st. The spread is worse than 9/11:

It’s hard to say how much of that will recover in January, but I think the recent negative credit outlooks for bond insurers are the prime reason.

“Le mot du jour” is now “counterparty risk”. I think next year it will be almost as popular as “subprime” today. “Subprime” is so-o-o Spring 2007, it’s already out of fashion, those old ladies on TV are not trendy🙂

Update. My opinion is that the first victim of the mounting counterparty risk is the municipal bond market. It’s a huge market, something like a trillion $ or so. When municipalities can’t refinance the debt at reasonable terms they will (and already are) cutting costs. I think we should expect some reductions across the board, from firefighting to road works. This cost cutting will break the shopping confidence among millions of public sector workers. If you need to update your driver license you better do it now before they suspend that activity🙂