Central banks wade in to stop second credit crunch

The US Federal Reserve and other major central banks ramped up their efforts to stave off another credit crunch yesterday by acting in concert to give lenders access to funds they need as the European sovereign debt storm rages on.

The Fed, along with the European Central Bank, the Bank of England, the Bank of Canada, the Swiss National Bank and the Bank of Japan said they would slash the cost to banks of securing US dollars by 50 basis points. The emergency action, which is reminiscent of the aggressive steps taken by the world's top monetary bodies during the financial crisis, is aimed atensuring that lenders don't fall prey to another credit crunch as conditions in the wholesale markets deteriorate.

The move will make it easier for troubled European banks, who have been finding it harder to tap the wholesale markets amid concern about theirexposure to European sovereign debt, to access the US dollar funds they need to go about their business.

But the central banks went further; the action to provide easier access to US dollars was accompanied by measures to set up temporary mechanisms that will allow them to provide funds in any of their other currencies "should market conditions so warrant".

"Once again, the world's central banks are being forced to move aggressively to counter a crisis that has grown in scale and scope because of inadequate policy responses on the part of other agencies," the chief executive of Pimco, Mohamed El-Erian, said.

News of the intervention, which follows other action from central banks to increase liquidity earlier this year, led to a sudden change in the mood among investors.

After selling for much of morning – a response to overnight plans from European finance ministers to increase the firepower for the European Financial Stability (EFSF) and to ratings cuts for numerous banks – they rushed back into the stock market, with the FTSE 100 soaring by more than 3 per cent. The German market was up by nearly 5 per cent, while Italy gained more than 4 per cent yesterday.