Sept. 30 (Bloomberg) -- Asian borrowing costs rose, with Japanese and Singapore money market rates reaching the highest in at least eight months, even as central banks pumped in cash to ease lending after U.S. lawmakers rejected a banking rescue.

Japan's overnight call loan rate rose to 0.6 percent, the highest in more than six weeks, and the three-month interbank offered dollar rate in Singapore jumped 11 basis points, or 0.11 percentage point, to an eight-month high of 3.90 percent as banks hoarded cash. Australian funding costs surged by the most since July.

``Counterparty fear in the banking sector is at a new extreme,'' said Greg Gibbs, director of currency strategy at ABN Amro Holdings Bank NV in Sydney. ``Credit conditions are as tight as a drum. Unless this settles down, central banks would need to cut rates globally to bring funding costs down.''

Credit markets are seizing up, tipping banks toward insolvency and forcing U.S. and European governments to arrange rescues of lenders including Wachovia Corp. Asian stocks dropped, led by financial companies such as Japan's Mitsubishi UFJ Financial Group Inc. and Sydney-based Babcock & Brown Ltd., after the U.S. House of Representatives yesterday voted down a $700 billion rescue plan. ``Markets around the world are under stress,'' Treasury Secretary Henry Paulson said.

The three-month interbank offered rate in Hong Kong rose by the most in nearly a week to 3.664 percent. The difference between the rate Australian banks charge each other for three- month loans and the overnight indexed swap rate jumped 14 basis points to 98 points, close to a six-month high. The gap has averaged 45 basis points this year.

`Systematic Failure'

``This crisis is not driven by corporate defaults but by a systematic failure of the banks themselves,'' said Anita Yadav, head of credit and hybrid research at UBS AG in Sydney. ``It's no longer about just paying higher borrowing costs, but also about being able to get the money from the market at all.''

The Bank of Japan injected more than 19 trillion yen ($182 billion) into the country's system over the past two weeks, the most in at least six years.

The Reserve Bank of Australia pumped in A$1.95 billion ($1.6 billion) today and has injected more than A$2 billion a day on average since Sept. 15, more than twice the level for the first half of this year.

The U.S. Federal Reserve yesterday said it will pump an additional $630 billion into the global financial system.

The Fed increased its existing currency swaps with foreign central banks, including the RBA, by $330 billion to $620 billion to make more dollars available worldwide. The Term Auction Facility, the Fed's emergency loan program, will expand by $300 billion to $450 billion.

Bank Writedowns

Banks have incurred $590 billion of writedowns tied to the collapse of U.S. subprime mortgage market as stocks plunged worldwide, erasing $8.9 trillion of wealth this year through Sept. 28. The Libor-OIS spread, which compares the three-month dollar interbank rate with the overnight indexed swap rate, stood at 233 basis points, putting cash scarcity at a record.

The BOJ and the Fed will double their swap agreement to $120 billion.

Foreign banks are paying at least twice as much as Japanese peers to borrow overnight funds in Japan's money market. Foreign banks borrowed overnight cash at interest rates of between 0.8 percent and 1 percent this morning, according to Tokyo Tanshi Co., a Japanese money market brokerage.

Japanese banks borrowed overnight at 0.4 percent to 0.5 percent. The Bank of Japan sets its target for the interbank overnight lending rate at 0.5 percent.

Australia's central bank is tripling its Fed swap line to $30 billion to boost the availability of U.S. dollars, the central banks said on their Web sites.

Hoarding Money

``We can be sure that funding pressures are not going to ease while there is so much uncertainty,'' said Adam Carr, senior economist in Sydney at ICAP Australia Ltd., part of the world's largest inter-bank broker. ``Cash is going to be at a premium. There's really no end in sight.''

Banks increased holdings at RBA exchange settlement accounts by A$3.1 billion yesterday to a record A$10.65 billion, as the nation's financial institutions hoard cash.

Banks are reluctant to lend to companies, and there are ``signs of a squeeze on commercial property,'' said Brian Redican, a senior economist at Macquarie Group Ltd. in Sydney. ``Developers are finding it increasingly difficult to get funding.''

Tightening Markets

The tightening of credit markets may have overwhelmed the Reserve Bank of Australia's Sept. 2 interest-rate cut, its first reduction since 2001. The interbank offered rate for Australian banks has climbed 49 basis points to 7.76 percent since policy makers brought down benchmark borrowing costs by 25 basis points.

Asian stocks plunged, dragging the benchmark MSCI Asia Pacific Index to a three-year low. Mitsubishi UFJ, Japan's largest bank, retreated 7 percent to 871 yen, and DBS Group Holdings Ltd., Southeast Asia's biggest, lost 4.5 percent to S$16.14 in Singapore.

Babcock & Brown, this year's worst-performing stock on the MSCI Asian index, tumbled 12 percent to A$2.07 in Sydney.

The cost of protecting Japanese and Australian corporate bonds from default increased.

The Markit iTraxx Japan Series 10 index rose 17 basis points to 175 at 12:39 p.m. in Tokyo, Morgan Stanley prices show. The benchmark of 50 investment-grade Japanese companies increases as investors' perceptions of credit quality deteriorate. The iTraxx Australia index climbed 23 points to 212.5, Citigroup Inc. prices show.

To contact the reporters on this story: David Yong in Singapore at dyong@bloomberg.net; Candice Zachariahs in Sydney at czachariahs2@bloomberg.net

Last Updated: September 30, 2008 00:45 EDT