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Definition: Euro Libor
It is also known as London Inter Bank offer rate (LIBOR) denominated in Euros. It is the interest rate at which banks borrow Euros from other bank for large short term loans. The rate is determined by the average lending rate of 16 banks who are member of British Bankers Association (BBA). The rate may fluctuate throughout the day.
It also helps banks to maintain liquidity so as to able to borrow to other banks that have surplus on hand quickly.
This device is generally used by public or private enterprises as a basis for euro loans to be made to less credit worth corporations.
For example: An enterprise wants to borrow Euros from a bank that is member of London interbank market. This bank doesn’t have enough cash and may borrow from any other member in the market at Euro Libor. Thus the enterprise can be charged a loan with an interest rate of 1% above the EURO Libor.
This mechanism was generally used in swap contracts dating back to pre-euro times. Thus it is not so commonly used.