Markets rebound as world's top banks unveil credit deal
Stock markets soared yesterday after the world's biggest central banks launched a coordinated action plan to help ease the pain in the world's financial system.
The Bank of England, US Federal Reserve, European Central Bank and the central banks of Canada, Japan and Switzerland, in a joint announcement, said they would make it easier for banks to borrow money if they need it.
"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 in a joint statement.
The announcement came just hours after China reduced bank reserve levels to release money for lending and help shore up slowing growth.
It was the first easing of Chinese monetary policy in three years - and higher growth in China could be crucial for a suffering global economy.
Stocks surged following the news. The Dow Jones industrial average jumped more than 400 points in early trading and was up 392 an hour after the opening bell. Germany's DAX was trading 4.7% higher, France's CAC was up 4.1%, the euro rose 1.1% to $1.3463 and oil was up $1.45 to $101.25.
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 sure what institutions are holding how much bad government debt.
Greece, the Republic and Portugal have all been forced to take international bailouts.
Banks already had to agree to forgo 50% of the value of their Greek debt holdings - and many fear that other struggling European countries might also demand a "haircut" on bonds.
A ratings downgrade by Standard -amp; Poors for six major US banks yesterday added to fears that Europe's woes would hurt the entire financial system.
This isn't complete solution... but it does buy time
Dramatic stuff from the big central banks: the ECB, the Fed, the Bank of England, the Bank of Japan and even the Swiss National Bank have joined together to increase dollar liquidity.
Or alternatively, once you cut through the jargon of the joint statement they've released, the Federal Reserve has massively cut the rate it charges to other central banks for access to dollars. This is a dramatic intervention by the Fed. Clearly, they're more aware than the moral hazard obsessives at the ECB that a disaster is approaching.
This move means that eurozone banks, which are struggling to fund themselves in any currency privately, can still provide dollars to their depositors - many of whom are fleeing Europe. It ought to stop dead the credit freeze between Europe's banks that has been growing for much of the last three months.
This, as the statement says, should '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'.
Coupled with the decision of the People's Bank of China to loosen monetary policy by cutting the reserve ratio, it should help flood the financial system with money ready to find people to spend it.
But while this should mean that Europe's banking system won't freeze up this week, the fundamental solvency issues haven't gone away. The reason why investors are pulling their money out of European banks - and refusing to lend to them - is because they think there's a chance that countries like Italy or Greece may suffer a messy default.
The Federal Reserve is not going to bail out Italy or Greece, however - the ECB or the Germans have to do that.
They've perhaps got a little more time now. Will they rise to the challenge?