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Saturday October 11, 5:44 AM What rate cut? Interbank lending rates keep rising Governments around the world have slashed interest rates and ramped up their lending to unprecendented levels, but banks are still charging each other extremely high borrowing rates _ a bad sign for the credit markets that remain close to paralysis. Traders will be closely monitoring the G-7 finance ministers meeting this weekend, and hoping the officials will consider guaranteeing lending between banks _ which could potentially bring down the relentlessly high key lending rate known as Libor. "That would go a long way for confidence," said Kevin Giddis, managing director of fixed income at Morgan Keegan. The ministers might also consider collectively guaranteeing bank deposits, allowing central banks to become clearing houses in cash-for-collateral transactions, or creating a super sovereign wealth fund, said Tony Crescenzi, analyst with Miller Tabak & Co., in a research note. The London Interbank Offered Rate, or Libor, for three-month dollar loans jumped to 4.82 percent on Friday from 4.75 percent Thursday. Just a month ago, three-month Libor was at 2.82 percent. Libor is the rate at which banks make unsecured loans to one another. Investors in the stock market, where heavy selling continued Friday, aren't going to get any relief until bank-to-bank lending rates come down. The rate is directly tied to many consumer loans, including adjustable-rate mortgages. If those rates rise, that means more mortgage defaults and foreclosures. The difference between three-month Libor and the three-month T-bill yield swung to its widest level in more than 25 years _ indicating that banks are viewing loans to other banks as significantly more risky than government debt. The yield on the three-month T-bill fell to 0.21 percent from 0.58 percent late Thursday. The discount rate was also at 0.21 percent. Overnight Libor has pulled back, a sign that banks were a bit more willing Friday to make extremely short-term loans. Libor for overnight dollar loans dropped to 2.47 percent Friday from 5.09 percent Thursday. That rate been very volatile lately, however, and remains well above the target fed funds rate, which the Federal Reserve lowered on Wednesday to 1.5 percent from 2 percent. The fed funds rate is the overnight rate at which banks lend funds that are held by the Federal Reserve to other banks; the Fed therefore has some control over it. Libor, on the other hand, is the average bank-to-bank lending rate on the wholesale market, and is a better benchmark for global short-term interest rates. It's not that banks aren't lending at all _ it's that they're doing so for shorter periods of time, to fewer borrowers, and at higher rates. "There's a lot of activity that's all been jammed up into overnight lending," said Lou Crandall, chief economist at Wrightson ICAP. This is tolerable for banks since they have a safety net from regulators, he said, but non-bank institutions are at risk. That's because they have to constantly resell their debt every night or couple of days, and if they're unable to do so on a given day, it could result in a big loss. The tightness in credit could have dire consequences for the economy, which relies on borrowing and lending to grow. Governments and companies around the world have been feeling the effects and taking action. Canada, for one, said Friday it is buying up to $21 billion in mortgages from the country's banks to maintain the availability of credit. In a positive sign, rates on commercial paper have been coming down from lofty levels, which is good for companies that rely on short-term financing from that market. Commercial paper is a type of debt that's either unsecured or backed by assets like mortgages; companies sell it to get funding for maintaining payrolls, buying inventory and other operations. Most top issuers on Friday were selling commercial paper with one-to-seven day maturities at rates of less than 1 percent, according to Morgan Keegan's Giddis. Longer-term commercial paper rates were also largely lower. Commercial paper for 30 days from American Express Co., for example, slipped to about 2.75 percent Friday, he said, while 30-day paper from General Electric Co. slipped to about 2.5 percent. "It could change in a moment's notice," Giddis said. "But between last night and today, the flows that we've seen, the tone is a little better." GE said Friday it will reduce commercial paper to $80 billion by the end of the year, down from $88 billion at the end of the third quarter and down from $100 billion earlier this year. "We have had no problems with our own (commercial paper), but I think we have just taken this issue off the table for investors," CEO Jeff Immelt told analysts Friday. The company's recent $15 billion in stock sales "gives us more cash, and now the backup lines plus cash are greater than (commercial paper)," Immelt said. On Thursday, the Fed said commercial paper outstanding dropped for the fourth straight week in the week ended Wednesday. Commercial paper outstanding has fallen by 30 percent to a seasonally-adjusted $1.55 trillion since the summer of 2007. The Fed announced Tuesday that it will be buying commercial paper to keep that market more liquid. Overall, though, investors and banks alike still appeared very nervous, swarming to Treasury bills as the stock market posted its eighth straight daily loss. The Dow Jones industrial average fell 128.00 to 8,451.19, closing at its lowest level since April 2003. Longer-term Treasurys, however, fell. The 2-year note fell 7/32 to 100 22/32 and yielded 1.64 percent, up from 1.55 percent. The 10-year note fell 28/32 to 100 28/32 and yielded 3.86 percent, up from 3.76 percent. The 30-year bond fell 20/32 to 106 4/32 and yielded 4.14 percent, up from 4.09 percent. The bond markets closed early Friday, and will be closed all of Monday for the Columbus Day holiday. ___ AP Business Writer Stephen Singer in Hartford, Conn., contributed to this report.