A little over two years ago, Stephanie Rawlings-Blake had never heard of Libor. The mayor of Baltimore had plenty of other things to keep herself occupied. Elected in 2010, she was dealing with the aftermath of a financial crisis that had left her city with the budget deficit of $120m and the cost of cleaning up the worst two-day snowstorm in the city's history. And then she found out the credit crunch had come back to take another bite out of the city's finances.

Baltimore is lead plaintiff in a class action lawsuit that alleges that banks including Barclays, Bank of America, HSBC, JP Morgan and UBS conspired to fix a set of key interest rates – the London Interbank Offered Rate, or Libor – costing the city millions in the process. So far, the Libor scandal has played out mostly under the radar in the US. But now it is gaining traction in Washington, and Baltimore's suit is putting a human face on a scandal legal experts predict could end up being the most costly of the credit crisis.

Firefighters, services for the elderly, school programmes – all these and more are being cut as a direct result of the actions of colluding bankers, Rawlings-Blake claims.

According to the court documents, Baltimore bought "tens of millions of dollars worth of interest-rate swaps" during the period when the alleged fixing took place. The suit, filed with top Washington law firm Hausfeld, alleges that between August 2007 and May 2010 the defendants conspired to suppress Libor below the levels at which it would have been set had they accurately reported their borrowing costs. Those manipulations had "severe adverse consequences" for Baltimore and others, according to the suit. Other cities are watching carefully and a raft of litigation is expected in the US.

The city had no choice but to fight, said Rawlings-Blake. "We are faced with closing fire companies, closing recreational centers … We have services that have been cut year after year; services that people depend on. Opportunities for young people, the cleanliness of the city: everything is affected by the budget," she said.

"We can't afford to leave money on the table," she said.

Baltimore has a reputation for taking on the banks. Earlier this month Wells Fargo settled a suit launched by the city four years ago that alleged the bank discriminated against black and Latino mortgage borrowers.

"It's certainly disappointing, and I understand why a lot of people have lost a lot of trust and faith in the financial institutions. They are pretty much playing fast and loose with the people they are meant to protect," she said.

"We stand up for ourselves," she said. "One thing about Baltimore is that we are not afraid of a fight. There are too many needs we have in this city."

But this case looks set to put all others in the shade. Policymakers around the world have called for an overhaul of the system that underpins $500tn of contracts globally – everything from home loans to arcane derivatives.

Stephen Bainbridge, a professor of law at UCLA, said the case was "one of the worst examples of abuse of trust that I can remember in 25 years of following corporate governance". Given the scale of Libor's influence, Bainbridge said, this could emerge as "the defining financial scandal of the meltdown".

Bainbridge believes the justice department may build an anti-trust case against those involved that could ultimately lead to a settlement as large as that agreed in the US's massive suit against the tobacco industry. Anti-trust laws allow three times the damages for those convicted of collusion.

But he believes a suit like Baltimore's may prove harder to prove. The city's lawyers will have to prove direct "loss causation" – in other words, that bankers allegedly fixing rates in London directly hit Baltimore's bank balance.

"Proving that chain of events can be difficult," said Bainbridge.

Baltimore city solicitor George Nilson said he was confident there was a good case to answer. He pointed out that the process of discovery – when the city gets hold of internal emails and documents from the bank – had not even started yet. Since the suit was filed he said he had "not heard anything that makes me feel less enthusiastic about the case."

Nilson said he had been taken aback by the massive level of interest in the case, especially from the European press. He said he expected that interest to grow as people in the US became more aware of the scandal. "What it says to the defendants is Libor is no longer something tucked away in a dark corner of the room."

He said that his one fear was that just as some banks were too big to fail, this could be a case that was "too big to try".