Notch another day of modest progress for the credit markets.

Short-term interest rates declined early Tuesday, as several central banks in Europe injected more cash into the financial system. The London rate for three-month loans in dollars fell 4 basis points to 3.47%, its 12th straight daily decline. The three-month rate for the euro, or Euribor, fell 5 basis points to 4.85%. However, interest rates in Asia rose, with the Hong Kong interbank offer rate, or HIBOR, rising 10 basis points to 3.84%

In addition, the difference between what banks and the U.S. Treasury pay to borrow dollars for three months, the TED spread, narrowed 14 basis points to 262 basis points Tuesday. The TED spread has now declined 172 points from 434 basis points more than a week ago.

Short-term rates, including overnight rates, are key sources of cash for corporations and other large institutions, which use the cash to pay suppliers, make payroll, roll over debt etc. Hence, very high overnight and short-term rates will discourage corporations from conducting business, restricting commerce and slowing the economy, economists say.

Thus far, credit conditions remain a cold as Rutland, Vermont on a January night, but there are hints of a thaw in the making.

Interest rates for three-month loans in dollars dipped Monday, after policy makers in the United States and Europe offered unlimited dollar funds and Europe governments took actions to recapitalize and bolster banks.

The London three-month rate decreased 7 basis points to 4.75%, Bloomberg News reported Monday. Also, the euro interbank offered rate, or Euribor, for one-week loans dropped 26 basis points to 4.37%.

Short-term rates, including overnight rates, are key sources of cash for corporations and other large institutions, which use the cash to pay suppliers, make payroll, roll over debt etc. Hence, very high overnight and short-term rates will discourage corporations from conducting business, restricting commerce and slowing the economy, economists say.

Actions seen lowering banks' anxiety

Economist Peter Dawson told BloggingStocks Monday the actions taken this weekend and Monday by industrialized nations and their respective central banks will help loosen credit markets and decrease anxiety that's tightened the flow of money, globally.

"Central bank actions to supply dollars will help re-liquify the markets. I can't say if this one action will stop the pack-rat-like hoarding of dollars, but eventually players in the system are going to realize that no matter how many dollars they hoard, central banks have more to add," Dawson said. "Regarding fiscal policy, the guarantees by governments to banks will help reduce bank-to-bank fear that banks they lend to are insolvent, which should inch us back toward more-typical bank-to-bank lending."

The mood of banks toward banks remains cautious and guarded. The London interbank offered rate, or LIBOR -- the rate banks charge each other for overnight dollar loans -- increased 157 basis points to 3.94% early Tuesday morning.

The Euribor, a similar rate for the euro, rose 22 basis point to 4.37%. However, the Euribor has fallen from Monday's all-time high of 5.35%.

Currency Trader Andrew Resnick told BloggingStocks Tuesday overnight interest rates remain at elevated levels mainly due to fear.

"The biggest problem, clearly, is the lack of confidence. There are distressed and bad bonds out there, but it should not be affecting the financial system this much. The reason it has is fear. No one knows who owns what bonds, and no one trusts anyone," Resnick said. "This is the worst condition I've seen in the credit markets in my 20 years of trading." Resnick added that he was presently flat, or had no open currency trading positions.

Resnick said central banks may have to guarantee the assets of creditors to banks and/or provide insurance (credit default swaps) to purchasers of corporate commercial paper to lower overnight interest rates and increase the flow of credit. Or central banks may have to "undertake a large investment in banks to recapitalize them," he said.