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Central banks move to help Europe, world economies

WASHINGTON — The Federal Reserve and other major central banks moved Wednesday 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 increasingly is global, the Chinese central bank, which has sought to slow the pace of domestic growth over the last year, also moved independently but unexpectedly Wednesday to encourage new lending by allowing banks to reduce their reserves.

The prospect of more cheap money sent stock indexes soaring. In New York, the Dow Jones Industrial Average jumped at the opening bell and added to its gains throughout the day. It finished up 490.05 points, its seventh-largest one-day gain and its best since March 23, 2009, two weeks after the stock market's post-meltdown low. Wednesday's advance also swung the Dow from a loss for the year to a gain. It closed at 12,045.68, its first close above 12,000 since Nov. 15.

A broad index of German stocks, the DAX, jumped almost 5 percent Wednesday, while the broad measure of U.S. stocks, the Standard & Poor's 500-stock index, climbed more than 4 percent. 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 address 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.

"The European sovereign debt problem will not be solved only with liquidity," the governor of Japan's central bank, Masaaki Shirakawa, told reporters in Tokyo. He said he "strongly" expected Europe to "push through economic and fiscal reform."

European leaders, increasingly concerned by a deteriorating financial picture, said Wednesday they were forming a plan to convince markets that the debts of nations like 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 on Dec. 8 and 9 as a looming deadline for those efforts.

"We are now entering the critical period of 10 days to complete and conclude the crisis response of the European Union," Olli Rehn, European commissioner for economic and monetary affairs, said Wednesday after a meeting of European finance ministers.

The Fed's policymaking committee approved the arrangements during a videoconference Monday morning by a vote of 9-1. The dissenting vote was cast by Jeffrey Lacker, president of the Federal Reserve Bank of Richmond, who said in a statement that the program amounted to an act of fiscal policy, which is the responsibility of the Treasury Department.

The arrangements carry little risk for the Fed, which receives an equal amount of the currency of the borrowing country together with a commitment to reverse the transaction at the same exchange rate. The loans also are modestly profitable, as the foreign central banks pass on to the Fed the interest payments that they collect from borrowers.

But the Fed's chairman, Ben Bernanke, could face fresh political criticism for the decision. Republican presidential candidates, including Newt Gingrich, the former House speaker, have blasted Bernanke for past lending to foreign banks, saying the Fed should focus on the United States.

Euro crisis glance

PLAN IN WORKS: European finance ministers deferred definitive action to shore up the euro. But speculation grew Wednesday that the 17 countries that use the euro will adopt stricter, more unified budget rules.

STRONGER CENTRAL BANK: Such unity could help the European Central Bank stabilize the debt crisis that's led to bailouts for three countries already.

How it should work

What happened: Foreign central banks are reducing by half a percentage point, to about 0.6 percent, the rate they charge commercial banks for dollar loans.

Commercial banks need dollars: The dollar is the No. 1 currency for international trade. The lower rate is designed to get credit flowing again.

To get the dollars to lend: Central banks go to the Fed and exchange their currency for dollars under a special swap program. Foreign central banks pay the Fed whatever interest they earn from commercial banks.

The expected result: If it all works, the market rates on dollar loans will drop, and stock and bond markets will calm down.

Central banks move to help Europe, world economies 11/30/11 [Last modified: Wednesday, November 30, 2011 10:56pm]
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