April 3 (Bloomberg) -- The cost of borrowing in dollars in London fell for a sixth day as signs the worst of the global financial turmoil may be over made banks less wary of lending.

The London interbank offered rate, or Libor, that banks say they charge each other for three-month loans dropped half a basis point to 1.16 percent today, the British Bankers’ Association said, bringing its decline in the past three weeks to 16 basis points. The Libor-OIS spread, a measure of the reluctance of banks to lend, was little changed at 94 basis points, down from 98 basis points on March 27.

Libor dropped every day this week as reports showed U.S. consumer spending stabilized in the first two months of the year and home sales rose in February. U.S. Treasury Secretary Timothy Geithner, who crafted a plan to relieve banks of toxic assets last month, said two days ago markets are showing “encouraging signs.” Leaders of the Group of 20 nations pledged more than $1 trillion yesterday to combat the worst recession in 60 years.

“There is more optimism in the market,” said Guillaume Baron, a fixed-income strategist at Societe Generale SA in Paris. “Geithner’s plan and the rules that came out of the G-20 will be helping banks. It’s positive.” Three-month dollar Libor will drop to 0.85 percent in June, 0.80 percent in September and 0.50 percent next year, he said.

Libor is the benchmark for $360 trillion of financial products around the world, or about $53,500 for every person on earth, including U.S. student loans, British mortgages and interest rates on company loans.

G-20 Blueprint

The BBA, an unregulated trade group, sets the rates each day by asking member banks how much it would cost them to borrow from each other for 15 different periods, from overnight to one year, in currencies from dollars to euros and yen. It then calculates averages, throwing out the four highest and lowest quotes. Sixteen banks contribute to the dollar fixing.

Royal Bank of Scotland Group Plc quoted a three-month rate that was 16 basis points higher than today’s Libor fixing, BBA data showed. JPMorgan Chase & Co. supplied the lowest rate, at 16 basis points below today’s rate.

The G-20 leaders delivered a regulatory blueprint yesterday that tightened curbs on hedge funds and other financiers. The leaders also pledged to triple the resources of the International Monetary Fund to $750 billion and allow China and other developing economies a greater say in the management of the world economy.

Mortgage Rates, Loans

Central banks around the world cut interest rates toward zero and pumped unprecedented amounts of cash into the financial system to revive lending as the global economy slumped. U.S. 30- year mortgage rates fell to a record low for the second week last week, hitting 4.78 percent, according to Freddie Mac. Applications for home loans rose for the fourth straight week, the Mortgage Bankers Association said.

Stocks and commodities have rebounded as investors bet the worst of the global slump may have passed. The Standard & Poor’s 500 Index has risen 2.3 percent since March 27. Should it remain higher, the measure would post the first four-week rally since jumping to a record 1,565.15 in October 2007. Oil stayed above $52 a barrel for a third day.

The Libor-OIS spread is still 83 basis points above its average in the five years before August 2007, when credit markets began to freeze amid surging defaults on U.S. subprime mortgages. Former Federal Reserve Chairman Alan Greenspan said in June he wouldn’t consider markets back to “normal” until the spread falls to 25 basis points.

TED Spread

The difference between what banks and the Treasury pay to borrow money for three months, the so-called TED spread, fell below 100 basis points this week for the first time since Feb. 26. It narrowed half a basis point to 94 basis points today, compared with last year’s high of 464 basis points reached on Oct. 10. It averaged 36 basis points in 2006.

Money markets, essential to keep finance flowing to consumers and businesses, began to seize up after BNP Paribas SA halted withdrawals on three hedge funds in August 2007. They collapsed after Lehman Brothers Holdings Inc. filed for bankruptcy on Sept. 15, driving dollar Libor up 200 basis points in the next 25 days to the highest level in 2008.

“A re-elevation is possible should things get tough again,” Padhraic Garvey, head of investment-grade debt strategy in Amsterdam at ING Groep NV, said in an e-mailed comment today. “However, looking beyond the noise, our central scenario sees Libor easing lower in the coming months and quarters.”

Garvey said in January that Libor may increase before heading lower in the “medium term.”

To contact the reporter on this story: Anna Rascouet in London arascouet@bloomberg.net

Last Updated: April 3, 2009 10:36 EDT