Borrowing rates fall as U.S. signals it will follow Europe By William L. Watts, MarketWatch LONDON (MarketWatch) -- Key short-term lending rates fell again Tuesday, offering further evidence that massive government bailouts and wide-ranging debt and deposit guarantees have started to thaw frozen interbank lending markets. The London interbank offered rate, known as Libor, for three-month dollar loans fell to 4.635% from 4.725% on Monday, while the one-month rate declined to 4.46875% from 4.56%. Libor's closely followed as a measure of borrowing costs in the interbank market. The three-month rate for euro loans dropped to 5.225% from 5.29875%, while the rate for three-month sterling loans fell to 6.24875% from 6.26875%. The rates and closely watched spreads that measure banks' willingness to lend to each other have soared in recent weeks. Commercial banks have become increasingly reluctant to lend to each other out of fear that borrowers could go bust. Tuesday's decline in rates is welcome news, but money-market rates "are still very high," noted Zach Witton, an analyst at Moody's Economy.com. Short-term Libor rates typically hold near official interest rates as set by central banks, while allowing for expectations of future changes in rates. But despite expectations that official rates are likely to fall further in coming months, dollar Libor, for instance, remains well above the U.S. federal funds rate of 1.5%. The European Central Bank's key rate stands at 3.75%, and the Bank of England's official rate is 4.5%. Moves by British and euro-zone governments on Monday to recapitalize the banking system with massive injections of taxpayer money, combined with guarantees of new bank debt and certain types of bank deposits, are designed to restore the willingness of banks to loan money to each other. President Bush on Tuesday formally announced the United States would follow suit, buying stakes in major banks and providing a range of guarantees. Treasury Secretary Henry Paulson unveiled full details in Washington. See full story. Central banks have taken unprecedented steps to flood the financial system with dollars and other currencies in an effort to provide liquidity. See full story. Tensions in the money markets have started to affect other credit markets. Fears of collapse in the financial system mounted last week, sending global equity markets into a massive tailspin and forcing policy makers to take dramatic steps to shore up troubled banks. Confidence can't be rebuilt instantly, Witton said. "We expect short-term money-market rates to remain on a gradual downward trend as financial institutions' confidence increases that European governments will act together to do whatever is necessary to support financial institutions," he said. Witton warned, however, that further problems for individual financial firms could reverse growing confidence in the interbank market.

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