With the voting down of $700-billion Paulson plan by the US congress, the overnight London inter-bank offered rate (LIBOR) climbed 431 basis points and surged to an all-time high of 6.88 per cent because of banks hoarding cash and refusing to lend, according to the British Bankers' Association,

Libor, is an acronym for the London Interbank Offered Rate, is the interest rate at which large international banks are willing to lend each other money on a short-term basis. It's calculated every business day in 10 currencies and 15 terms, ranging from overnight to one year.

A week ago, Libor was at 2.95 per cent, but yesterday it surged to an all time high of 5.07 per cent while the dollar rate also hit a peak since January. The euro interbank offered rate, or Euribor, climbed to a record 5.05 per cent for one month loans.

Yesterday's rise in the overnight rate was accelerated by the mad rush for cash by banks before the end of the financial quarter. Many banks desperate for funds paid 11 per cent for $30 billion in overnight funds from the European Central Bank, up from 3 per cent on Monday.

Banks were unwilling to buy each other's shortest term debt but ironically investors are buying bank's stocks as shares shot up across the board. Investors are buying government bonds because, as of now, it is the safest investment.

Banks are also apprehensive of lending out of fear with so many banks collapsing or being rescued they may never see the cash they lend.

European banks will have no choice but to pass on the greater than before borrowing costs to companies by invoking the ''market disruption clauses''' as the overnight dollar rates rose sharply.

The money markets, that should be the engine driving the financial system seems to be in complete disarray, hence the Federal Reserve, the European Central Bank and the Bank of England pumped in $330 billion into the market at low interest rates on Monday.

The estimates of the ECB went haywire as it lent banks €190 billion for a week after originally estimating the need by banks would be nearly €40 billion.

Europe also saw a huge demand for the dollar, forcing the ECB to lend $30.7 billion more in one-day funds. It had earlier lent $30 billion at a marginal rate of 11 per cent which is nearly six times the Federal Reserve's 2 per cent interest rate.

In India many companies such as Reliance Communication, Tata Steel, Tata Chemicals, Ballarpur Industries and Sterlite Technologies have taken loans to the dollar-linked LIBOR as the interest rates are low. It will most probably have an impact on their profits for the coming quarter.