World central banks agree on joint loan plan
AP photoMajor central banks around the globe took coordinated action yesterday to ease the strains on the world’s financial system, saying they would make it easier for banks to obtain dollars if they need them. Stock markets and the euro rose sharply on the move.
“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,” said a joint statement by central banks across the world including, the U.S. Federal Reserve, the European Central Bank, the Bank of England and the central banks of Canada, Japan and Switzerland.
The MSCI All-Country World Index climbed 3.1 percent at 10:23 a.m. in New York and is up 7 percent in three sessions. The Standard & Poor’s 500 Index gained 3.2 percent to 1,233.78 as only six stocks retreated. The euro strengthened 1.1 percent to $1.3465.
The main IMKB 100 Index Istanbul Stock Exchange (İMKB) reached 54.517 with a nearly 4.7 point increase from a day earlier.
The local currency, meanwhile, was traded at 1.837 Turkish Liras per dollar, with a slight gain compared with 1.857 a day earlier. The lira also fell against the euro to 2.473 yesterday from 2.478.
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 U.S. 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. Greece, Ireland and Portugal have all been forced to take international bailouts and Italy, Spain and Belgium are seeing their borrowing costs rise sharply.
A ratings downgrade by Standard & Poor’s for six major U.S. banks on Nov. 29 added to fears that Europe’s woes would hurt the entire financial system. If one or more European governments default, that would unleash a shock to the world’s financial system that, at the very least, would lead to recessions in the United States and Europe, severe losses for banks and a global stranglehold on lending.
The 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 rate will be applied to all operations starting from Monday.