Nov. 11 (Bloomberg) -- Money-market rates in London fell as central banks injected cash into the financial system to counter a collapse in lending.

The London interbank offered rate, or Libor, that banks charge each other for three-month loans in dollars slid 6 basis points to 2.18 percent today, the 22nd consecutive decline and the lowest level since Oct. 29, 2004, according to British Bankers' Association data. The comparable euro rate fell 7 basis points to 4.32 percent, the lowest level since Jan. 24. There was no overnight dollar rate today because of a U.S. holiday.

``The declines in Libor have gained some momentum recently and that's definitely encouraging to see,'' said Christoph Rieger, a fixed-income strategist at Dresdner Kleinwort in Frankfurt. ``I'm not getting too carried away though as we're still at elevated levels and people remain reluctant to lend.''

Financing costs dropped from last month's peaks as central banks provided unlimited dollar funding and governments offered bailouts and guarantees to financial institutions. Credit markets, which began seizing up after BNP Paribas SA halted withdrawals on three funds in August 2007, froze after Lehman Brothers Holdings Inc. collapsed on Sept. 15., destroying lenders' confidence they would be repaid.

Policy makers in Australia, China, the U.K., Japan, the U.S., India, Taiwan, South Korea and the euro region cut borrowing costs within the past three weeks. China, which reported today that inflation cooled to the slowest pace in 17 months, pledged $586 billion in spending two days ago to bolster growth.

Overnight Deposits

The ``barrage'' of actions appears ``to be working,'' Goldman Sachs Group Inc. economist Seamus Smyth wrote yesterday in an investor report. Composite indexes used by the bank ``have moderated substantially since mid-October.''

Banks yesterday lodged 209.5 billion euros ($268 billion) in the European Central Bank's deposit facility at 3.25 percent, down from 225.5 billion on Nov. 7. The daily average in the first eight months of the year was 427 million euros. Financial institutions also borrowed 11.4 billion euros from the ECB at the emergency overnight marginal rate of 4.25 percent, up from 8.4 billion euros.

The ECB said today it will drain cash from money markets to counter a ``large positive liquidity imbalance.'' It will begin a liquidity-absorbing, fine-tuning operation at a variable tender rate, with a maximum bid rate of 3.75 percent, at 3 p.m. in Frankfurt.

Stocks Drop

``The easing in stress in money markets in the two top market areas, America and Europe, is having an impact on the rest of the world,'' said Dariusz Kowalczyk, chief investment strategist at CFC Seymour Ltd. in Hong Kong. ``Government ownership of major banks and guarantees on lending are gradually restoring confidence.''

Stocks fell in Europe and Asia today, sending the MSCI World Index down for the first time in three days, as investors speculated the profit slump will deteriorate. U.S. index futures retreated. The Standard & Poor's 500 Index is 39 percent lower this year, on course for its worst annual performance since 1931.

The G-20 said Nov. 9 it's prepared to act ``urgently'' to bolster growth and called on governments to cut borrowing costs and raise spending. The International Monetary Fund said the U.S., Japan, the euro region and the U.K. will contract next year in their first simultaneous recession since World War II.

The gap between what banks and the Treasury pay to borrow for three months, known as the TED spread, narrowed 28 basis points to 175 basis points. The gauge, which reached 464 basis points on Oct. 10, averaged 31 basis points in the five years to July 31, 2007, before the credit squeeze began.

Libor-OIS

Libor, the benchmark for $360 trillion of financial products worldwide, is set by a panel of banks in a daily survey by the British Bankers' Association before noon in London.

The Libor-OIS spread, which former Federal Reserve Chairman Alan Greenspan said in June should serve as a measure for determining when markets have returned to normal, was at 172 basis points. The spread measures the difference between the rate banks charge for three-month dollar loans relative to the overnight indexed swap rate.

The spread compares with 87 basis points on the last trading day before Lehman declared bankruptcy, and an average of 11 basis points in the five years before the onset of the financial crisis.

To contact the reporter on this story: Gavin Finch in London at gfinch@bloomberg.net

Last Updated: November 11, 2008 11:05 EST