Top central banks around the world on Wednesday announced steps to prevent a credit crunch among banks in Europe that are struggling with the region's debt crisis, boosting global share prices and the euro.
The U.S. Federal Reserve, the European Central Bank and the central banks of Canada, Britain, Japan and Switzerland said in a surprise joint announcement they had agreed to lower the cost of existing dollar swap lines among other measures.
The swap lines are intended to ensure banks outside the United States have easy access to dollars, which have become more difficult for banks in Europe to obtain in the market as investor concerns about the euro zone debt crisis have grown.
The cost of the lines will be reduced by 50 basis points from Dec. 5, the statement said.
Other new measures included setting up bilateral swap arrangements between the central banks so that any of them could provide liquidity in any of their currencies. The swap arrangements are good until Feb. 1, 2013.
"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," the central banks said.
But analysts said the measures were merely palliative, buying time for Europe to come up with more concrete measures to quell the crisis. If anything, the market's positive reaction was due in part to the expectation that this would be the first of other corrective steps taken by the ECB.
The actions on Wednesday, which included a decision by the ECB to lower the margin it requires European banks to put up for dollar loans, stole a page from coordinated efforts to battle the 2007-2009 financial crisis.
During that episode, the Fed set up dollar swaps with the ECB and the Swiss National Bank in December 2007. It increased those lines when Lehman Brothers collapsed in September 2008 and opened swaps with Japan, Canada and England in an effort to battle the most virulent stage of the crisis.
The facilities for the ECB, Japan, Britain and Switzerland are unlimited; swaps with Canada are capped at $30 billion.
WALL OF WORRY
Three-month dollar Libor rates — a measure of what banks in Europe are charging each other for dollar loans — have risen to levels not seen since early 2010, when Europe's debt debacle flared up. Policymakers hope their action drives those lending costs lower.
Stock prices rose sharply, helped in part by a strong batch of U.S. economic data, including better news on private-sector employment. The euro jumped on the announcement and the U.S. dollar retreated sharply.
U.S. two-year interest rate swap spreads over Treasuries, another gauge of market funding stress, narrowed to their tightest level in three weeks. Other key money market measures for funding also showed a lessening in strains for banks to obtain dollars.
In an interview with Fox Business Network, one top Fed official said the action was taken not to bail out Europe, but to ensure there were ample dollars available for those who wanted to buy U.S. goods.
"They need to pull their socks up just like our Congress needs to do and get their act together and solve the underpinning uncertainty," Dallas Federal Reserve Bank President Richard Fisher said.
Fisher told the news channel that there was no specific triggering event.
CHINA CHANGES GEARS
In another action to ease credit strains, China's central bank cut the reserve requirement ratio for its commercial lenders on Wednesday for the first time in nearly three years. The move reduces the amounts banks must keep in reserve and frees up funds for lending to cash-strapped small firms.
As recently as the middle of 2011, China was still tightening monetary policy to combat inflation.
But Europe's two-year-old debt crisis has raised concerns that global economic growth will take a sharp hit.
In the United States, the Fed noted that U.S. banks were not having difficulty getting funds in short-term funding markets. But if conditions deteriorate, the U.S. central bank said it had "a range of tools available" to use as a backstop and would deploy them as necessary.
Financial markets are already bracing for a rate cut when the ECB meets next week.
