Global bank rates slip

By Kirsten Donovan and Richard Leong

LONDON/NEW YORK (Reuters) - Banks trimmed most lending rates to each other on Friday but their declines were some of their smallest this week, suggesting the improvement in global money markets may have run its course.

Risk premiums spiked for some market rates as a dramatic equity sell-off worldwide revived concerns about counterparty risk, but some analysts downplayed the move as an indication traders are pricing in steep central bank rate cuts.

Most borrowing costs for dollars, euros and sterling in the unsecured interbank lending market in London were flat to 7 basis points lower than Thursday.

The spreads or risk premium on three-month Libor above anticipated central bank rates, seen as a gauge of banks' willingness to lend to each other, widened more than 10 basis points. The three-month dollar Libor/overnight Index Swap (OIS) spread widened for the first time in a week.

Traders blamed the wider spreads on the flood of forced stock sales in overseas markets and anxiety after data showed the British economy contracted.

The rise in risk premiums was also a result of a sharp fall in OIS rates as traders factored in deep rate cuts from key central banks, analysts said.

"It had to do with European weakness. Its stock market got hit hard and the UK had some bad economic news." said Brian Edmonds, head of rates trading at Cantor Fitzergald in New York.

European shares tumbled to their lowest close since mid-2003 with the FTSEurofirst 200 index of top European shares ending down about 5 percent. On the other side of the Atlantic, the Standard & Poor's 500 index was off 4 percent.