Bank rates soar on cash dash, cenbanks supply funds

By Jamie McGeever and Richard Leong

LONDON/NEW YORK (Reuters) - The cost of borrowing overnight dollars skyrocketed on Tuesday, prompting central banks worldwide to unleash billions into money markets to prevent them from a lockup, a day after U.S. lawmakers' rejection of a $700 billion financial industry bailout.

A flood of money from central banks seemed successful in meeting banks' quarter-end scramble for cash. It helped to drive the overnight lending rate between U.S. banks close to zero percent from its multi-year high.

"Money markets are more of a problem than stock markets. Perceived counterparty credit risk ... probably won't go away for a while," said Everett Brown, strategist at IDEAGlobal.

The hoarding of cash was especially aggressive in the euro zone, where a handful of banks have been rescued by governments since Monday due to rising losses stemming from the credit crisis.

Cash was also in demand among investors to settle trades whose values swung wildly over the past several months.

The London interbank offered rate (Libor) for overnight dollars jumped by a record 430 basis points to 6.87 percent, the highest in at least 7-1/2 years.

QUARTER-END HUMP

Reflecting the scarcity of funds in the interbank market, banks also borrowed 15.481 billion euros overnight from the ECB, the largest amount in almost six years.

In response to this intense quarter-end demand for dollar funds, the European Central Bank lent $60 billion overnight in two separate operations.

It initially loaned $30 billion dollars at a whopping rate of 11 percent -- more than five times the Federal Reserve's 2 percent target rates, followed by another $30 billion in a subsequent auction.

In addition to its dollar efforts, the ECB was pouring in 190 billion of euros via its regular weekly auction but tensions were high there too.

Banks bid up to 5.5 percent, and the weighted average rate of 4.96 percent was the highest on record for a main refinancing auction.

Across the Atlantic, the Federal Reserve conducted a $20 billion in 28-day repurchase agreements.

For their part, the central banks of Japan, Australia and Britain injected liquidity into their respective banking systems on Tuesday to help banks meet funding obligations over the coming days, weeks and months.

The surge in overnight and term funds due to efforts from central banks pulled some money rates from their early highs.