When news broke that the British bank Barclays had rigged the London interbank offered rate, or Libor, it came as no surprise to many in the municipal finance world. Some, like the city of Baltimore, had already taken action in the form of a lawsuit.
Use of interest-rate swap agreements tied to Libor soared beginning in the 1990s as governments sought to hedge against rate hikes and add certainty to budgets, with banks receiving fees. When interest rates plummeted once the recession hit, public agencies were faced with two unattractive options: lose money by failing to refinance floating rate debt or pay hefty contract cancellation fees.
To make matters worse, recent allegations of banks manipulating the Libor rate revealed further losses agencies may have suffered.
“It was a bad deal to begin with, and now we also find out that the situation was rigged,” said Sharon Ward, executive director of the Pennsylvania Budget and Policy Center.
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For more on the LIBOR scandal, see:
What Americans Need to Know About the LIBORgate Scandal
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