World's major central banks take coordinated action to ease strain on world's financial system, saying they would make it easier for banks to get money if they needed it

Cindy Allen

FRANKFURT, Germany , November 30, 2011 (Associated Press) – Major central banks around the globe took coordinated action Wednesday to ease the strains on the world's financial system, saying they would make it easier for banks to get dollars if they need them. Stock markets rose sharply on the move.

The European Central Bank, U.S. Federal Reserve, the Bank of England and the central banks of Canada, Japan and Switzerland are took part.

As Europe's debt crisis has been rapidly spreading, the global financial system is showing signs of entering another credit crunch like the one that followed the 2008 collapse of U.S. investment bank Lehman Brothers. The possibility that one or more European governments might default on their debts have raised fears of a shock to the global financial system that would lead to severe losses for banks, recession in the United States and Europe and another global credit crunch.

The central banks said in a joint statement the moves were designed to "provide liquidity support to the global financial system."

The statement said the central banks have agreed to reduce the cost of temporary dollar loans to banks — called liquidity swaps — by a half percentage point. The new, lower rate will be applied to all central bank operations starting on Monday.

They are also taking steps to ensure banks can get ready money in any currency if market conditions warrant by establishing a temporary network of reciprocal swap lines.

Stocks surged following the news. Germany's DAX was trading 4.7 percent higher, France's CAC was up 4.1 percent, and Dow futures in New York were up 2.2 percent. The euro surged up 1 percent and oil was immediately up $1.45 to $101.25.

Fears of more financial turmoil in Europe have already left some European banks dependent on central bank loans to fund their daily operations. Other banks are wary of lending to them for fear of not getting paid back.

Such constraints on interbank lending can hurt the wider economy by making less money available to lend to businesses.

A ratings downgrade by Standard & Poors for six major U.S. banks on Tuesday added to fears that Europe's woes would hurt the financial system globally.

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