The world's biggest central banks moved suddenly to provide banks with funds and prop up the global financial system today in a dramatic effort to turn back the runaway euro zone crisis.
The central banks of the euro zone, Canada, Britain, Japan, US and Switzerland said in a joint statement they were lowering the cost of providing dollars to banks in a move that pushed stocks worldwide through the roof.
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 interest rate on this operation by half a percentage point from December 5, but also extending it until February 1, 2013.
Bank of Japan Governor Masaaki Shirakawa said the move was aimed at giving markets "a sense of relief," but warned it was not enough on its own to solve Europe's fiscal woes.
"The European debt problem can't be solved by liquidity provisions alone," he said. "The step is meant to buy time for European countries to proceed with their fiscal and economic reform," he added.
French Finance Minister Francois Baroin hailed the move as "very positive", on the sidelines of a European Union meeting in Brussels.
Christian Schulz, a senior economist with Berenberg Bank, said the action could relieve serious strain on markets. "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." Stocks around the world spiked sharply in response, led by banking shares.
The central 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.
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 euro zone banks hit by the debt crisis.
