Money Market Rates Fall for Third Day as Crunch Eases (Update2)

By Gavin Finch

Dec. 20 (Bloomberg) -- The cost of borrowing in euros fell for a third day as central banks keep injecting cash into global money markets to ease a year-end lending squeeze.

The three-month euro interbank offered rate, or Euribor, dropped 2 basis points to 4.79 percent, the European Banking Federation said today. It was 4.26 percent at the end of July. The three-month rate for pounds declined 7 basis points to 6.14 percent, the lowest in more than four months, the British Bankers' Association said.

Short-term borrowing costs have begun to fall since policy makers from the U.S., U.K., euro region, Switzerland and Canada announced plans on Dec. 12 to counter a credit shortage that is threatening global growth. The Federal Reserve will hold a second emergency $20 billion auction of loans today. The European Central Bank offered $10 billion of loans in dollars yesterday, while the Swiss National Bank lent $4 billion.

``They've pumped so much money into the system that rates have tumbled, but then they had to,'' said Stuart Thomson, who helps oversee $46 billion in bonds at Resolution Investment Management Ltd. in Glasgow, Scotland. ``They've addressed the symptoms of this crisis, but not the root causes.''

Interbank lending rates have soared this year following the collapse of the U.S. subprime-mortgage market, with financial institutions reporting losses in excess of $70 billion. Morgan Stanley announced a steeper-than-forecast $3.56 billion fourth- quarter loss yesterday after $9.4 billion of writedowns on mortgage-related holdings.

$500 Billion Injection

Euro borrowing costs had their biggest-ever decline two days ago after the ECB added an unprecedented $500 billion worth of euros into the banking system. The central bank said today it drained 150 billion euros ($215.2 billion) from the region's money market for a second day.

The ECB ``stands ready to steer liquidity toward more balanced conditions if this is needed to align short-term interest rates with the minimum bid rate,'' the Frankfurt-based central bank said in a statement today.

The ECB first offered extra cash on Aug. 9, when it lent 95 billion euros of emergency funds.

The credit-market crisis ``may last a couple of more months,'' ECB council member Klaus Liebscher said yesterday. ``Many banks have already closed their books and business activity is only moderate. It may take until the banks' full- year results are published.''

Treasuries Fall, Stocks Rise

Treasury notes fell, European stocks snapped a three-day decline and U.S. stock-index futures climbed. The TED spread, or difference between what the U.S. government and banks pay for three-month loans, fell 3 basis points to 199 basis points today. It was 35 basis points at the start of the year.

The Dow Jones Stoxx 600 Index rose 0.4 percent, and Standard and Poor's 500 Index futures expiring in March climbed 0.2 percent.

The implied yield on the Euribor futures contract expiring June 2008 dropped 2 basis points to 4.45 percent today, taking its decline this week to 9 basis points, or 0.09 percentage point.