Central banks join forces to ease credit crisis

Updated: 2007-12-13 09:46

WASHINGTON -- Central banks around the world banded together to stem a mounting credit crisis on Wednesday in their first coordinated action since terror attacks shut down US financial markets on September 11, 2001.

Traders in the two and five year bond options pit of the Chicago Board of Trade signal orders in Chicago, December 11, 2007.  Central banks around the world banded together to stem a mounting credit crisis on Wednesday. [Agencies]

The US Federal Reserve, the European Central Bank and the central banks of Canada, England and Switzerland announced steps to make it easier for stressed banks to access cash in the hopes of quelling a credit crunch that threatens to knock the US economy into recession and slow growth worldwide.

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The Bank of Japan and Sweden's Riksbank also issued statements that they were lending support to the plan.

"There was a desperate need for new weapons to be deployed," said Marco Annunziata, chief economist at Unicredit in London. "The strength of the new central banks' offensive comes from its novelty, its targeted nature, and its coordinated deployment."

The news initially brought a wave of relief to stock markets after sharp declines the previous day when the Fed cut interest rates by a modest quarter-percentage point, dashing hopes of a more aggressive move.

But by early Wednesday afternoon, stocks cut their gains as investors weighed the implications of the proposed plan. The Dow industrials ended the day up 41.13 points at 13,473.90 after jumping 250 points early in the day, while US Treasury bond prices slid.

The Fed said it would launch a "temporary term auction facility." The move expands the number and the reach of banks allowed to borrow money to meet temporary shortages of funds.

The US central bank announced two auctions of up to $20 billion each in short-term funding next week, with two others raising unspecified amounts to follow in January.

While the dollar volume of the measures was smaller than some past emergency efforts, analysts said the united front that central banks were presenting underscored the seriousness with which they viewed current stresses in financial markets.

"The size here is not the point ... it's the signal here that matters," said Bruce Kasman, chief economist for JPMorgan Chase. "These guys are coming and telling you they're going to be there. They're going to come in and make sure the liquidity issues in the marketplace don't get to be too severe."


In addition to the Fed's new auction plan, the US central bank said it would provide dollars to the ECB and the Swiss National Bank through so-called currency swap lines to help ease funding pressures in Europe.

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