The world’s major central banks unveiled a new strategy Wednesday morning to create a wall of money to try to prevent Europe’s financial woes from undermining the stability of the global banking system.
The Federal Reserve, European Central Bank and central banks in Canada, Britain, Switzerland and Japan said in a joint announcement that they will extend the timing and lower the interest rate paid on “swaps,” arrangements that have been used intermittently since late 2007 to funnel dollars to the banking systems of countries where there is need.
The action recalls the fall of 2008, when the global central bankers took a series of coordinated actions to try to stem a worldwide financial panic. However, the impact of the latest measure might be more symbolic than substantive. The Fed already had made available unlimited dollars to other leading central banks, and $2.4 billion of such lending was outstanding as of last week (that number might increase now with the lower interest rate).
The policy does nothing to address the fundamental problems in Europe — namely a loss of confidence in the ability of Italy and other nations to repay their debts and fears that this could cause the euro currency area to break apart. It could, however, help European banks avoid any cash shortage. And more broadly, the new move offers a sense of common purpose and deep resolve among the world’s central bankers at a time of widespread fears, even if the substantive impact on the crisis is slight.
Separately, China’s central bank eased a key regulation to allow banks to lend more money as concerns mount about a possible slowdown in the world’s second-largest economy. In cutting bank reserve requirements for the first time since December 2008, the People’s Bank of China signaled that its focus is shifting from inflation to economic growth.
The joint central bank action, the China news and a report from payroll company ADP that showed a rise in U.S. job creation in November are “signs of distress in the international financial system and an economy that has some spark but no fuel to catch fire,” said Steven Ricchiuto, chief economist at Mizuho Securities in a report.
Stock markets in the United States and in Europe surged after the news was announced. The Dow Jones industrial average and the broader S&P 500 index were up about 3.2 percent in early trading. The tech-heavy Nasdaq rose about 3 percent. In Europe, Germany’s DAX soared 4 percent. France’s CAC 40 was up 3.3 percent, while Britain’s FTSE 100 rose 3.1 percent.
The coordinated action comes as Europe, in particular, is in the grips of a growing credit crunch, making it harder for some companies — and households — to get quick, affordable access to cash.
European banks have seen their funding costs rise to the highest levels since the collapse of Lehman Brothers in late 2008. That, in return, has weighed on the region’s growth, increasing fears that constricted lending could plunge the continent back into a recession and deal another setback to the global economic recovery.
