Nov. 10 (Bloomberg) -- The cost of borrowing dollars for three months in London fell after China announced a $586 billion stimulus package and the Group of 20 nations urged central banks to counter the global credit freeze by cutting interest rates.

The London interbank offered rate, or Libor, that banks say they charge each other for such loans declined 5 basis points to 2.24 percent today, the lowest level since November 2004, the British Bankers' Association said. The overnight rate rose 2 basis points to 0.35 percent, still 65 basis points below the Federal Reserve's target rate. The Libor-OIS spread, a measure of banks' willingness to lend, narrowed.

``We are on the right path,'' said Jan Misch, a trader at Landesbank Baden-Wuerttemberg, Germany's biggest state-owned lender. ``A lot has been done to deal with the problem, and we haven't got more bad news on the banking front lately. We're watching how long it will take for full confidence to return to the money market and for banks to resume lending as normal.''

Money-market rates declined as central banks provided unlimited dollar funding and governments offered bailouts and guarantees to financial institutions. Policy makers in Australia, China, Japan, India, the U.S., the euro region and the U.K. cut borrowing costs within the past three weeks.

In a sign that central bank attempts to loosen credit are starting to work, interest rates on U.S. commercial paper, or CP, fell to the lowest in at least 12 years today. Rates on the highest-ranked 30-year CP dropped 16 basis points to 0.88 percent, or 12 basis points less than the Fed's target's rate. Average rates soared to a record 278 basis points more than the target rate on Oct. 9, according to yields offered by companies and compiled by Bloomberg since January 1996.

China Investment

China's cabinet pledged ``fast and heavy-handed investment'' in housing and infrastructure through 2010 and a ``relatively loose'' monetary policy, according to a State Council statement yesterday. The stimulus package is equivalent to almost 20 percent of the country's gross domestic output.

The G-20 said yesterday it's prepared to act ``urgently'' to bolster growth and called on governments to cut borrowing costs and raise spending as the world's leading industrialized economies battle a looming recession. The International Monetary Fund forecasts the U.S., Japan, the euro region and the U.K. economies will all contract next year in their first simultaneous recession since World War II.

HSBC, AIG

HSBC Holdings Plc, Europe's biggest bank, said today it set aside $4.3 billion in the third quarter for bad loans in the U.S. and forecast ``further deterioration.'' American International Group Inc., the insurer rescued by the U.S., booked $7.05 billion in writedowns during the third quarter on the value of credit-default swaps and marked down other holdings by $18.3 billion before taxes.

Financial institutions lodged 225.5 billion euros ($288 billion) in the European Central Bank's overnight deposit facility Nov. 7, down from 297.4 billion euros the previous day, the ECB said, indicating many banks are still reluctant to lend to each other. The daily average in the first eight months of the year was 427 million euros.

In Asia, three-month Hibor, the benchmark for Hong Kong interbank loans, dropped 10 basis points to 2.14 percent as the city's monetary authority added funds to the system. Australian banks lowered the rate they charge each other for three-month loans by 3.7 basis points to 4.95 percent as the Reserve Bank of Australia signaled more rate cuts. A basis point is 0.01 percentage point.

Libor-OIS Spread

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. Members provide estimates on how much it would cost to borrow in 10 currencies for terms ranging from one day to a year.

The Libor-OIS spread, which former Fed Chairman Alan Greenspan said in June should serve as a measure for determining when markets have returned to normal, narrowed 6 basis points to 170 basis points today. The spread measures the difference between the rate banks charge for three-month dollar loans relative to the overnight indexed swap rate.

That compares with 87 basis points on the last trading day before Lehman Brothers Holdings Inc. went bankrupt on Sept. 15, and an average of 11 basis points in the five years before the crisis started.

To contact the reporter on this story: Anchalee Worrachate in London at aworrachate@bloomberg.net

Last Updated: November 10, 2008 11:39 EST