Bank lending still hobbled as Congress deliberates

By Pedro Nicolaci da Costa and Jamie McGeever

NEW YORK/LONDON (Reuters) - Interbank lending remained at a standstill worldwide on Friday as investors nervously awaited a U.S. House of Representatives vote on a $700 billion (396 billion pound) financial rescue package.

Key benchmark rates for the banking industry extended their upward march. Three-month dollar Libor rates climbed to 4.33375 percent, the highest since early January, while their euro-denominated equivalent surged to a record.

This credit freeze was forcing central banks to continue flooding the global banking system with cash in an effort to lubricate stalled capital markets, which were suffering from a heavy dose of mistrust between financial institutions.

Adding to the anxiety was fear over the outcome of the House of Representatives' vote on a bailout package aimed at shoring up the banking sector, whose travails seemed to be spilling over into the real economy.

The U.S. labour market, for instance, posted its worst performance in over five years in September, with 159,000 jobs wiped out.

The pace of deterioration in the economy was so rapid that faith in the rescue plan was waning.

"Events are moving awfully fast relative to policy," said Neal Soss, chief economist at Credit Suisse. "The economy is weakening significantly and there's more of that ahead because the credit strains of earlier in the year have only intensified."

The premium to borrow at Libor over anticipated policy rates, as measured by average Overnight Index Swap rates, blew out further to around 290 basis points, another historic high.