Libor (London interbank offer rate) has recently come in for some high-powered scrutiny, as serious questions are being raised about how it is set. This matters a lot because more than US$150 trillion of financial products are tied to Libor benchmarks, which is the equivalent of over two
times expected world GDP in 2008.
Each day, 16 banks in London are surveyed by the British Bankers Association (BBA) for the rates they charge other banks to borrow, for terms from overnight to one year. The BBA then publishes these rates, and they become the benchmark for a vast array of sovereign, commercial and consumer lending.
The problem is that the banks participating in the Libor system are being accused of quoting falsely low rates. Suspicions were raised when Libor rates did not seem to reflect the market gyrations at the height of the credit crunch.
Insiders speculate that these banks have shifted to quoting their 'best' rates, not the rates they are actually lending at. The BBA and other regulators are investigating. If they find there has been manipulation, Libor rates may well spike higher, and the cost implications could be enormous.
Borrowers may have been getting a rate break, depositors may have been short-changed. The scale of the problem is impressive. At 0.1 per cent (one tenth of one per cent) the loss to lenders is US$150 billion - way more than New Zealand's entire annual GDP. It is likely that the issue involves much more than 0.1 per cent.
NZ$ interest rates are quoted on Libor, and have been for many years. It is one of only ten currencies quoted on this market, although undoubtedly one of the smallest. As we are a debtor nation, if there has been any impact on NZ$ quotes, we will have benefited in the past, but stand to suffer if there is any correcting adjustment.
- INTEREST.CO.NZ
