World's central banks act to ease market strains

Major central banks around the globe teamed up Wednesday to ease the strains that Europe's debt crisis has placed on the world's financial system. Stock markets rose sharply in response.

The coordinated action aims to stimulate economic growth by making it easier for banks to lend to each other and to businesses by providing dollars if they need them. It was taken by the United States Federal Reserve, European Central Bank, Bank of England and the central banks of Canada, Japan and Switzerland.

The announcement came just hours after China's central bank took steps to shore up slowing growth. It was the first easing of Chinese monetary policy in three years - and stronger growth in China could be crucial for a suffering global economy.

Stocks markets around the globe surged. The Dow Jones industrial average traded 410 points higher in midday trading New York time. Germany's DAX rose 5 per cent and France's CAC was up 4.0 per cent. The euro rose 1.1 per cent to $1.3463 and oil was up $1.32 to $101.11.

The six central banks agreed to reduce the cost of temporary dollar loans they offer to banks - called liquidity swaps - by a half percentage point. The new, lower rate will be applied to all central bank operations starting Monday.

The announcement also extended the time the temporary dollar lines will be available by six months to February 1, 2013. The swap line programme had been scheduled to end August 1, 2013.

Non-US banks need dollars to fund their US operations and to make dollar loans to companies that need the US currency. The dollar is the world's leading currency for central bank reserves and is widely used in international trade.

"Obviously, these moves are designed to increase the flow of dollar liquidity to European banks, which are struggling to attract short-term funding because of questions about their exposure to potential losses on holdings of European sovereign bonds," said Paul Ashworth, chief US economist at Capital Economics.

He explained that Wednesday's move does not expose the Fed to propping up ailing European banks.

"The ECB actually makes the loans to these banks, so the Fed is not on the hook for any losses if a European bank failed," Ashworth added.

As Europe's debt crisis has spread, the global financial system is showing signs of entering another credit crunch like the one that followed the 2008 collapse of US investment bank Lehman Brothers. Banks are afraid to lend to each other, since no one is really sure what institutions are holding how much bad government debt.