Fed boosts banks living on borrowed time

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.