Central banks around the world announced Wednesday they will take action to provide market liquidity and lower the borrowing costs of dollars.
The move, coming at a time when the eurozone debt crisis continues to fester, aims to shore up global financial markets and ease the credit crunch among European banks.
Analysts cautioned that such efforts can only boost market confidence in the short run, but will not address the underlying problems of the eurozone debt crisis.
EASING THE CREDIT CRUNCH
The U.S. Federal Reserve, along with the central banks of Canada, Britain, Japan, Switzerland and the European Union, said Wednesday they have agreed to lower the interest rate on dollar swap lines by 50 basis points from Dec. 5.
The swap lines, first introduced by the central banks to deal with the subprime mortgage crisis in 2008, are designed to provide easier access to dollars for banks outside the United States.
By cutting the costs of borrowing dollars in half for foreign commercial banks, the move will help ease the pressure on the Eupopean market, which is struggling with shrinking financing channels.
Starting this year, the U.S. Money Market Funds have gradually suspended their lending to the European banks out of growing concern over the latter's huge risk exposure to the Greek debts.
According to a report released by J.P. Morgan, lending to European banks in the U.S. market has been reduced by more than 700 billion U.S. dollars over the past year alone.
Masaaki Shirakawa, head of Japan's central bank, said the move was aimed at giving markets "a sense of relief."
"It should ease the panic around European banks significantly and help prevent a devastating credit crunch," he said.
In another move to ease the credit crunch, China's central bank cut the reserve requirement ratio for its commercial lenders Wednesday for the first time in nearly three years.
The Brazilian central bank Wednesday also cut its annual basic interest rate from 11.5 percent to 11 percent.