Central banks team up in bid to stave off global financial crunch

Major central banks across the world today launched a multi-billion-dollar effort to stave off a collapse in the global banking system.

The Bank of England joined the US Federal Reserve, the Bank of Japan, the European Central Bank, the Swiss National Bank and the Bank of Canada in offering to pump billions of dollars of loans into banks.

They are attempting to ease a growing crisis where US banks have been increasingly reluctant to lend dollars to their peers in the eurozone because of the danger of defaults. Today, the central banks set up new arrangements with each other to lower the cost of lending dollars, which economists said was effectively like cutting interest rates.

The move comes just a day after Chancellor of the Exchequer George Osborne warned the country faces six years of austerity. Jeremy Cook, chief economist at foreign exchange company World First, said: "This may have been a signal that the money markets were a short shove away from complete collapse.

"Clearly the world's central bankers have had enough of all the political mudslinging and intransigence and they've decided to take the situation by the scruff of the neck.

"This could be a critical moment for the global economy."

Stock markets rocketed on the news this afternoon, with the German DAX index leaping more than 4%. The FTSE 100 surged 3% - by 169.4 points to 5506.24 while the Dow also leaped.

The central banks issued a statement saying: "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."

Central banks only act together like this in times of extreme crisis. Similar measures were seen at the height of financial crisis which followed the collapse of Lehman Brothers.

They have agreed to lower the pricing on the existing temporary dollar liquidity swap arrangements by half a percentage point, starting from December 5.

The central banks have also set up a series of bilateral agreements to lend to each other.

Christian Schulz of Berenberg Bank said: "This shows that the ECB and its partners are aware of the funding stress European banks are under at the moment."

It was not immediately clear why the banks had decided to act today, although some pointed to the fact that yields on one-year German government debt went negative this morning, theoretically meaning investors were paying Germany for the privilege of lending it money.

The announcement came shortly after China's central bank cut the amount banks have to hold as reserves for the first time since 2008.