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Interbank lending rates ease on European bank support

The lower rates were an indication that financial institutions were now a little less reluctant to lend money among themselves after eurozone heads of state and government agreed on Sunday to guarantee interbank loans until December 31, 2009.

The 15 leaders also pledged to prevent the failures of big banks by backing re-capitalisation operations.

Sunday's initiative followed a decision on Friday by the Group of Seven leading industrialised powers to enable banks to raise capital from both the public and private sectors.

The three-month London inter-bank offered rate (Libor) in dollars fell to 4.7525 percent from 4.8187 percent on Friday.

The three-month Euribor rate, the reference in the eurozone, dropped to 5.318 percent from 5.381 percent on Friday, its sharpest decline since the end of January.

Analysts say that the money markets, on which banks lend to each other, had been all but closed for business for days, with nervous banks keeping their money to themselves and thereby endangering the flow of credit to businesses.

The Libor and Euribor rates are among the most important benchmarks, watched by the whole financial system. The Libor rate in particular is a reference worldwide and is given for many different types of loans over different periods.