FRANKFURT, Germany (AP) — The central banks of the wealthiest countries, trying to prevent a debt crisis in Europe from exploding into a global panic, swept in Wednesday to shore up the world financial system by making it easier for banks to borrow American dollars.
Stock markets around the world roared their approval. The Dow Jones industrial average shot up more than 400 points. The stock market rose more than 5 percent in Germany and more than 4 percent in France.
The action represented the most extraordinary coordinated effort by the central banks since they cut interest rates together in October 2008, at the depths of the financial crisis.
But while the steps should ease borrowing for banks, they do little to solve the long-term debt problem in Europe, leaving markets still waiting for a permanent fix. European leaders gather next week for a summit.
The European Central Bank, which has been reluctant to intervene to stop the growing crisis on its own continent, was joined in the decision by the Federal Reserve, the Bank of England and the central banks of Canada, Japan and Switzerland.
And China, which has the largest economy in the world after the European Union and the United States, reduced the amount of money its banks are required to hold in reserve, another attempt to free up cash for lending.
The display of worldwide coordination was meant to restore confidence in the global financial system and to demonstrate that central banks will do what they can to prevent a repeat of 2008.
That fall, fear settled in after the collapse of Lehman Brothers, a storied American investment house. That caused banks around the world to severely restrict lending to each other. The credit freeze triggered panic among investors, which resulted in a meltdown of stock markets.
On Oct. 8, 2008, the ECB and central banks in the United States, England, China, Canada, Sweden and Switzerland cut interest rates together after a series of high-stakes phone calls.
The Dow fell that day, during the worst of the financial meltdown. But that action, like Wednesday's, was a signal from the central banks to the financial markets that they would be players, not spectators.
Three years later, investors have been nervously watching Europe to see whether they should take the same approach — sell first, ask questions later. World stock markets have been unusually volatile since this summer.
The European crisis, which six months ago seemed focused on the relatively small economy of Greece, has since metastasized. It now threatens the existence of the euro, the common currency used by 17 countries in Europe.
But beyond that, the crisis has the potential to wreak worldwide economic havoc. Fear in financial markets could cause lending to dry up, both from banks to businesses and from banks to each other.
There have been early signs, particularly in Europe, that it is becoming more difficult to borrow money — especially as U.S. money market funds scale back their lending to banks in the euro nations because of perceived risk from the debt crisis.
"The purpose of these actions is to ease strains in financial markets and thereby mitigate the effects of such strains on the supply of credit to households and businesses and so help foster economic activity," the central banks said in a joint statement.
The joint effect will make it easier for banks around the world to get dollars if they need them. Loans made in U.S. dollars are important because dollars are the No. 1 currency for international trade.
In May 2010, as the European debt crisis started to bite, the Federal Reserve agreed to swap dollars for foreign currencies held by other leading central banks. The foreign central banks could then lend dollars to their banks.
That agreement was supposed to expire Aug. 1, 2012. Monday's announcement extends it six months, until Feb. 1, 2013.
Under the agreement, the central banks are reducing by half a percentage point — to about 0.6 percent — the rate they charge banks for short-term dollar loans. The lower rate is designed to get credit flowing again.
"It shows that policymakers are on the case," said Roberto Perli, managing director at the International Strategy & Investment Group, an investment firm. He said it has symbolic value even if it does not have a big impact on credit markets.
If it works, the rates on dollar loans will drop, and stock and bond markets will calm down. The banks' action is not a direct fix for the debt crisis in Europe, but it shows that the banks are able to take coordinated action to ease credit.
The decision to cut the interest charged on the dollar swaps was taken by the Federal Reserve following a video conference meeting held by Fed officials on Monday morning.
The Federal Open Market Committee, the Fed's policy-setting panel of board members from Washington and regional Fed bank presidents, approved the decision on a 9-1 vote. The president of the Fed's regional bank in Richmond, Va., voted no.
"We welcome and support the actions taken by central banks around the world today to help ease pressure on the European financial system and help foster the global economic recovery," U.S. Treasury Secretary Timothy Geithner said in a statement.
