16 Sep 2011

Global markets welcome central bank loan

9:24 pm on 16 September 2011

Global share markets have reacted positively after five leading central banks said they were taking new steps to tackle the financial crisis.

The banks will provide extra short-term loans in US dollars to commercial banks to make sure they have enough funds available to repay debts on time.

The announcement coincided with a call by International Monetary Fund managing director Christine Lagarde for ''bold action'' to break a vicious circle of weak growth and high debt.

Tokyo markets opened higher and shares in New York rose for the fourth consecutive day.

The US Federal Reserve, the European Central Bank, the Bank of England and the central banks of Switzerland and Japan will all lend dollars over three months to banks from the middle of October.

The new loans are being issued in dollars because European banks can already access additional euro funds from the European Central Bank.

The move is precautionary and not event-driven, a central banking source told the BBC, but the unspoken aim of the coordinated action is to ease the strains in the system caused by the eurozone crisis.

There have been reports of Asian and US banks cutting back their lending to counterparts in Europe and European banks are reluctant to lend to each other, worsening the liquidity problems in the eurozone banking system.

The markets welcomed the announcement, but traders know the current crisis is far from over, the BBC reports.

Central banks carried out similar action to boost the liquidity of commercial lenders at the height of the financial crisis in 2008. The facility has been withdrawn and reintroduced a number of times since then.