Nov. 25 (Bloomberg) -- The interest rate banks charge each other for three-month loans in dollars, a benchmark for global borrowing costs, is starting to rise as the world's biggest economies fall into a recession.

The London interbank offered rate, or Libor, for such loans climbed for a third day today, to 2.20 percent, according to the British Bankers' Association's survey of 16 banks. The increase signals that even as the Federal Reserve and Treasury pumped more than $3 trillion into the financial system, governments are failing to unlock credit markets.

Policy makers are ``making enough liquidity available to keep banks in business, but banks aren't confident enough to pass on that liquidity,'' said Ralf Preusser, a London-based fixed-income strategist for Deutsche Bank AG. ``The reason for the slowdown in the decline is the diversion of funds away from buying toxic assets to the consumer sector. This is an impediment to sustained improvement in the interbank market.''

While dollar Libor fell for 23 days through Nov. 12 after the Fed enacted programs to free up lending in the biggest response to an economic emergency since the New Deal, cash remains scarce. The Libor-OIS spread, which measures the willingness of banks to lend, widened today to the most in two weeks.

Rescue Programs

The Fed committed as much as $800 billion to unfreeze credit for homebuyers, consumers and small businesses, it said today in Washington. The central bank will purchase as much as $600 billion in debt issued or backed by government-chartered housing-finance companies. It will set up a $200 billion program to support consumer and small-business loans.

Credit markets, which began seizing up after BNP Paribas SA halted withdrawals on three investment funds in August 2007, froze after the bankruptcy of Lehman Brothers Holdings Inc. on Sept. 15, spurring governments and central banks around the world to bail out financial institutions and inject cash into money markets. Banks, brokerages and funds are cutting jobs amid almost $1 trillion of writedowns and credit losses since the start of 2007.

``Private liquidity is not coming back,'' said Guillaume Baron, a Paris-based fixed-income strategist at Societe Generale SA. ``We saw some interbank flows maybe three weeks ago, but it has disappeared again. It's hard to say why. People don't see a genuine improvement.''

The Fed will purchase as much as $100 billion in direct debt of Fannie Mae, Freddie Mac and the Federal Home Loan Banks and up to $500 billion of mortgage-backed securities backed by Fannie, Freddie and Ginnie Mae, it said today.

`Not Functioning'

The Treasury said yesterday it will extend its emergency program guaranteeing money-market funds through April 2009. Funds currently participating in the insurance program are eligible to continue in the effort, it said. The program currently covers more than $3 trillion of assets.

In a sign banks remain wary of lending, financial institutions lodged 222.2 billion euros ($289 billion) overnight with the European Central Bank, the fourth straight day the figure exceeded 200 billion euros. Banks borrowed 1.97 billion euros at the ECB's emergency overnight marginal rate of 3.75 percent.

``Unfortunately the interbank market is still not functioning as it should,'' ECB council member Ewald Nowotny said in an interview with Bloomberg Television in Vienna yesterday. ``We do have progress. However, until the end of this year, there will be a huge preference for hoarding liquidity.''

The cost to protect against defaults on corporate bonds fell for the third day as the Fed announced the $800 billion program. Credit-default swaps on the Markit CDX North America Investment Grade Index of 125 companies in the U.S. and Canada dropped 11.5 basis points to 245 basis points, according to broker Phoenix Partners Group. Rates in Europe also declined.

Asian Rates

Interest rates on U.S. commercial paper slid to the lowest in at least 12 years, with rates on the highest-ranked 30-day CP dropping 15 basis points to 0.8 percent, or 20 basis points less than the Fed's target lending rate, according to yields offered by companies and compiled by Bloomberg. It's the lowest level since at least January 1996, when Bloomberg's CP records begin.

Money-market rates in Asia also increased today. Tokyo's three-month interbank lending rate rose for a 12th day, to 0.848 percent, the highest this month. Singapore's Sibor, for U.S. dollar loans, climbed 4.5 basis points to 2.19 percent, snapping five days of declines.

The Libor-OIS spread, which former Fed Chairman Alan Greenspan said in June would serve as a gauge of the severity of the credit freeze, widened nine basis points to 177 basis points. The TED spread, which measures the difference between what the U.S. government and banks pay for three-month loans, narrowed eight basis points to 208 basis points.

Libor, the benchmark for $360 trillion of financial products worldwide, is set by a panel of banks in a survey by the British Bankers' Association before noon each day in London. Members give estimates for how much they would charge to lend for a range of maturities in currencies including the dollar, euro, yen and pound.

To contact the reporter on this story: Kim-Mai Cutler in London at kcutler@bloomberg.net

Last Updated: November 25, 2008 13:23 EST