Current Exchange Market and Challenges Essay

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Exchange Markets

Global Credit Markets

Assess the importance of LIBOR to the world's financial/credit markets.

The London Inter-Bank Offered Rate (LIBOR) is one of the single most important determinants of interest rates in the world. As such, it commands an unparalleled effect on the world financial and credit markets. According to the text by Kennon (2012), the vast majority of the credit-worthy banks in the world look to the interest rates set daily by the LIBOR in order to author their own interest rates. In this regard, the LIBOR sets the climate for interest rates in a way that is more immediate, dynamic and impacting that the occasional and reactionary terms offered by organizations such as the United States Federal Reserve.

As Kennon notes, the interest rates offered by the LIBOR are produced every day at 11AM London time and, from there, may shift numerous times during the course of a trading day. The fact of that LIBOR is the primary determinant in shaping interest rates means that it can have a profound impact on the long-term economic prospects of whole nations.

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Indeed, its setting of interest rates will have a direct bearing on the interest rates on the highest scale loans such as those engaged between national governments in the interests of providing economic aid. As the text by Kennon notes, "LIBOR is important because it is often used as the base for variable-rate government and corporate loans and derivative-based products such as credit swaps. A small, impoverished nation, for example, may have to pay a spread of a percentage point or two above and beyond the established LIBOR rate; thus, an increase or decrease in LIBOR will result in a corresponding rise or fall in its cost of borrowing." (Kennon p. 1)

This means that the LIBOR is a determinant entity in establishing or relieving the economic burden placed on nations both in the developed sphere. Another aspect of importance in understanding the profound impact of the LIBOR on the world's….....

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