THE US Federal Reserve and other major central banks moved yesterday to help foreign banks more easily borrow and lend money, seeking to forestall a breakdown of global financial markets and giving Europe more time to wrestle with its debts.
The latest round of interventions by central banks, including the expansion of an existing Fed program that lets foreign banks borrow dollars at a low interest rate, reflects growing concerns that Europe's financial problems are hampering growth.
In a sign that the fallout is increasingly global, the Chinese central bank, which has sought to slow the pace of domestic growth over the past year, also moved independently but unexpectedly to encourage new lending by allowing banks to reduce their reserves.
In Europe and the US, where the announcement broke well before sharemarket openings, the prospect of more cheap money sent stock indexes soaring. A broad index of German stocks, the DAX, jumped almost 5 per cent, while in the US Standard & Poor's 500 stock index climbed more than 4 per cent. Short-term borrowing costs also declined modestly for some European governments and banks.
But policymakers and analysts were quick to caution that the Fed's action did not tackle the fundamental financial problems threatening the survival of the European currency union. At best, they said, efforts by central banks to ease financial conditions could allow the 17 European Union countries that use the euro sufficient time to agree on a plan for its preservation.
European leaders, increasingly concerned by a deteriorating financial picture, said they were forming a plan to convince markets that the debts of nations such as Italy and Greece were not overwhelmingly large and to set new rules to constrain borrowing by euro-zone members. They pointed to a scheduled meeting in Brussels next week as a deadline for those efforts.
Policymakers in Europe and the US have seemed paralysed for more than two years by the challenges of reducing debt and increasing growth. That has left central bankers to act alone.
The Fed said yesterday's move was designed to ease a particular strain on the global economy: it has become increasingly difficult for foreign banks to borrow dollars, which they need to finance existing obligations and to make loans.
The Fed and the other central banks said they would reduce roughly by half the cost of an existing program under which banks can borrow dollars from their own central banks, which in turn get them from the Fed. The banks also said loans would be available until February 2013, extending a previous cutoff of next August.
Frequently Asked Questions about this Article…
What did the US Federal Reserve and other central banks do to help foreign banks borrow dollars?
The Fed and other major central banks expanded an existing program that lets foreign banks borrow dollars via their own central banks and cut the cost of that program by roughly half. They also extended the availability of those dollar loans until February 2013 (up from a previous cutoff in August).
Why did central banks step in to make dollar lending cheaper for foreign banks?
Policymakers moved to ease strains on the global financial system because it had become increasingly difficult for foreign banks to borrow dollars needed to finance existing obligations and to make new loans. The intervention aimed to forestall a breakdown in markets and give Europe more time to address its debt problems.
How did global stock markets react to the Fed’s announcement?
Markets jumped on the prospect of cheaper dollar funding: a broad German index (the DAX) rose almost 5% and the US S&P 500 climbed more than 4%, according to the article.
Does the Fed’s action solve the eurozone’s underlying debt problems?
No. Analysts and policymakers warned the move does not tackle the fundamental financial issues threatening the euro currency union; at best it can buy time for euro-zone countries to agree on a plan to preserve the euro.
What effect did the central bank moves have on borrowing costs for European governments and banks?
Short-term borrowing costs declined modestly for some European governments and banks after the announcement, but the article notes this was a limited and temporary easing rather than a permanent fix.
What did China’s central bank do in response to the global strain?
Independently of the Fed, the Chinese central bank unexpectedly encouraged new lending by allowing banks to reduce their reserve requirements, a move intended to boost domestic credit supply.
What should everyday investors watch next after the central banks’ intervention?
Investors should monitor developments in Europe — including the scheduled Brussels meeting next week that leaders signaled as a deadline for an EU plan — as well as short-term borrowing costs, market volatility, and any further central bank actions that affect dollar liquidity.
How long will banks be able to access the cheaper dollar loans and what does that mean for markets?
The cheaper dollar loans were extended through February 2013, giving markets and European policymakers more time to address debt challenges. For investors, this extension may ease immediate funding stress and reduce short-term market risk, but it doesn't remove the need for political solutions to the eurozone’s debt issues.
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