Central banks launch crisis action to shore up global system

Central banks moved suddenly to provide banks with funds and prop up the global financial system on Wednesday in a dramatic effort to turn back the runaway eurozone crisis.

Central banks moved suddenly to provide banks with funds and prop up the global financial system on Wednesday in a dramatic effort to turn back the runaway eurozone crisis.

The central banks of the eurozone, Canada, Britain, Japan, United States and Switzerland said in a joint statement they were lowering the cost of providing dollars to banks and making other currencies available, pushing stocks in Europe and the euro sharply higher.

The central banks said they were engaging in "coordinated actions to enhance their capacity to provide liquidity support to the global financial system".

"The purpose of these actions is to ease strains in financial markets and thereby mitigate the effects of such strains on the supply of credit to households and businesses and so help foster economic activity," they added.

The arrangement allows the central banks to lend dollars to commercial banks that might be finding it hard to borrow them directly from other banks and is aimed at easing tensions in the crucial interbank lending market.

The banks said they were not only reducing the cost of this operation from December 5, but also extending it until February 1, 2013.

The banks also agreed to allow cash swap arrangements in any of the participating countries' currencies if market conditions require them.

"At present, there is no need to offer liquidity in non-domestic currencies other than the US dollar, but the central banks judge it prudent to make the necessary arrangements so that liquidity support operations could be put into place quickly should the need arise," it said.

Such dollar operations were used to ease a credit crunch during the financial crisis of 2008-2009 and resumed in September in response to a dollar shortage among eurozone banks hit by the debt crisis.

European stocks surged on the news, with the German equity market up more than four percent, Spain and Italy more than three percent and France over four percent.

This "will probably help banks to get necessary liquidity to run their domestic operations in a smooth way," an Italian trader told Dow Jones Newswires.

The euro also spiked on the foreign exchange markets.

Christian Schulz, a senior economist with Berenbank, said the action would cut the penalty interest rate on US dollar swaps to 0.6 percent from 1.1 percent at the moment and could relieve serious strain on markets.

"With today's action, central banks signal that they are aware of the issue and prepared to act. As always in market panics with central bank action, the signal is more important than the actual size of the action," he said.

"While today's central bank action does not resolve the European sovereign debt crisis, it should ease the panic around European banks significantly and help preventing a devastating credit crunch."