Oct. 20 (Bloomberg) -- Money-market rates fell, extending last week's declines, as governments bailed out banks and policy makers intensified efforts to combat the freeze in lending with cash injections.

The London interbank offered rate, or Libor, that banks charge each other for three-month loans in dollars slid 36 basis points to 4.06 percent, the biggest drop in nine months, according to the British Bankers' Association. The overnight- dollar rate declined 16 basis points to 1.51 percent, the lowest level in more than four years. The three-month rate for euros fell. The Libor-OIS spread, a measure of cash availability, dropped below 300 basis points for the first time in almost two weeks. Rates on three-month Treasury bills rose to a month high.

``The policies put in place by authorities around the world have clearly reduced the risk of more bank defaults,'' said Nick Stamenkovic, a fixed-income strategist in Edinburgh at RIA Capital Markets. ``I expect interbank rates to continue to gradually decline over the coming weeks as central banks flood the market with cash.''

Policy makers have redoubled efforts to end the 14-month- old credit crunch that's threatening to tip the global economy into a recession. Interbank lending evaporated after Lehman Brothers Holdings Inc. filed for bankruptcy Sept. 15, shattering confidence among lenders and sending borrowing costs to records.

ING Rescue

Rates on three-month bills rose 32 basis points, or 0.32 percentage point, to 1.11 percent, the highest since Sept. 23.

The difference between what banks and the U.S. Treasury pay to borrow for three months, the so-called TED spread, was 171 basis points lower than on Oct. 10, when it reached the highest since Bloomberg began tracking the data in 1984.

ING Groep NV, the biggest Dutch financial-services firm, will get a 10 billion-euro ($13.4 billion) lifeline from the Dutch government after mounting credit-market losses drove the stock to a 13-year low. The government will buy non-voting preferred shares and appoint two representatives to the board, the Amsterdam-based company said yesterday. The stock surged 25 percent today.

European Central Bank President Jean-Claude Trichet said policy makers have put banks ``on the path'' to recovery by pumping unprecedented amounts of cash into money markets.

``I expect the banks to normalize their relationships, meaning that they start lending to each other and that they lend to their clients,'' Trichet said in an interview on French radio RTL yesterday. The banking system is ``on the path to normalization,'' he said.

Hong Kong's three-month interbank rate tumbled 53 basis points, the most in 10 years, to 3.66 percent today, after the city's Monetary Authority injected HK$4 billion ($515 million).

Commercial Paper

Rates for one-month commercial paper fell to a three-week low today, with the yields on the highest-rated commercial paper placed by dealers and due in 30 days dropped 13 basis points, the third-straight decline, to 3.32 percent, the lowest since Sept. 26, according to data compiled by Bloomberg.

Commercial paper is used by companies to meet short-term financing requirements.

``We're seeing the worst of the seizure in money markets starting to come to an end,'' said Warren Hogan, head of economics at Australia & New Zealand Bank Ltd. in Sydney. ``The government guarantees that have been announced globally are having an effect in the market.''

Though interbank rates have declined, financial institutions remain wary of lending to each other, preferring to deposit cash with central banks.

Banks on Oct. 17 lodged a record 239.6 billion euros in the ECB's overnight facility at 3.25 percent. They also borrowed 14 billion euros from the ECB at the emergency overnight marginal rate of 4.25 percent, up from 13 billion euros a day earlier. The ECB's benchmark rate is 3.75 percent.

Libor-OIS Spread

The three-month dollar rate is still 256 basis points more than the Federal Reserve's key rate of 1.5 percent, up from 120 basis points a month ago. At the start of the year, the spread was 43 basis points.

The Libor-OIS spread, which measures the difference between the three-month dollar rate and the overnight indexed swap rate, narrowed 35 basis points to 295 basis points today, down from 364 basis points on Oct. 10. The rate was 24 basis points on Jan. 24, while the average was 8 basis points in the 12 months to July 31, 2007, before the credit squeeze began.

Overnight indexed swaps are over-the-counter traded derivatives in which one party agrees to pay a fixed rate in exchange for the average of a floating central-bank rate during the life of the swap. For dollar swaps, the floating rate is the daily effective federal funds rate.

The TED spread narrowed by 70 basis points to 293 basis points today, down from 464 basis points on Oct. 10.

Credibility Questioned

While the reliability of the Libor-setting process has been criticized amid the global credit squeeze, it's used to determine rates on $360 trillion of financial products worldwide, from mortgages to company loans and derivatives.

Libor is set by a panel of banks in a daily survey by the British Bankers' Association by noon in London. Members provide estimates on how much it would cost to borrow in 10 currencies for terms from one day to a year. The Bank for International Settlements said in March some lenders may have ``manipulated'' rates to keep from appearing like they were in financial straits.

Interbank lending rates jumped this year as banks hoarded cash after the U.S. subprime market collapsed, prompting writedowns and losses exceeding $660 billion worldwide. Funding costs eased last week after central banks around the world offered lenders unlimited amounts of U.S. currency.

India Cuts Rate

India's central bank unexpectedly lowered its key repurchase rate today for the first time since 2004 as the risk of an economic slowdown caused by the global financial crisis outweighed inflation pressures. The Reserve Bank of India cut its overnight lending rate to 8 percent from 9 percent, according to a statement in Mumbai.

The Bank of England started its new framework to provide emergency funds to banks and said it will consider revising collateral rules in the future.

The new framework features a discount window that allows banks to swap assets for government bonds. The new standing facility cuts the penalty for borrowing funds directly from the central bank overnight.

To contact the reporters on this story: Gavin Finch in London at gfinch@bloomberg.net; Patricia Lui at plui4@bloomberg.net

Last Updated: October 20, 2008 14:55 EDT