LONDON — Five of the world's top central banks acted jointly Thursday to provide unlimited dollar loans to banks, a move aimed at easing the growing tensions in the eurozone's financial sector and shielding the global economy from its jitters.
The European Central Bank said it will coordinate with the U.S. Federal Reserve, the Bank of England, the Bank of Japan and the Swiss National Bank to offer three-month dollar loans to banks through the end of this year. There was no separate statement from the Fed.
The coordinated effort aims to prevent Europe's debt crisis from derailing the global economy's rebound from recession, a topic that will dominate talks between U.S. Treasury chief Timothy Geithner and his European counterparts at a meeting from Thursday night through Saturday in Poland.
European banks have seen their shares sink recently on fears they were having trouble getting short-term loans from each other because of fears they were exposed to huge losses from the government bonds of Greece and other troubled eurozone countries.
When a bank is rumored to be in danger of suffering large losses, other banks will stop lending to it for fear of not getting their money back — a scenario that created the global credit crunch in 2008. Ultimately, the threat to the wider global economy is that banks will stop lending to businesses, stifling growth.
Stocks, particularly banking shares, and the euro rallied Thursday on hopes the dollar loans will relieve the funding pressures.
The program will likely prevent a panic for the next few months, but it's only a first step, said Mark McCormick, a currency strategist at Brown Brothers Harriman.
"You're warding off contagion and crisis, but it's not going to solve the problem, which is too much debt," McCormick said, but added it was smart for the central banks to address the problem early.
Indicators of banking stress now are the worst they have been in three years, he said, but they remain better than they were before the U.S. investment firm Lehman Brothers failed exactly three years ago — on Sept. 15, 2008 — setting off a worldwide credit crunch.
Financial markets have been hugely volatile for weeks on fears that Europe's debt crisis will spin out of control and threaten Europe's banking sector. Moody's ratings agency this week downgraded two major French banks on those concerns.
McCormick said the long-term impact of Thursday's move was uncertain.
"I think a lot of people took it as a red flag, but it's more of a pre-emptive strike to get ahead of the stresses that we had when Lehman failed," he said.
Markets and the euro currency, which were already higher on the day, were buoyed by the news. The 17-nation euro currency surged to a daily high of $1.3934 before retreating slightly to $1.3858.
Shares in French bank BNP Paribas in Paris jumped 13.4 percent while Societe Generale gained 5.4 percent. Traders had singled them out in recent days as being particularly exposed to the bad debt of Greece.
The news out of Greece was downbeat Thursday, with its finance minister warning that Greece must brace for a fourth year of recession, and data showing that unemployment had hit a new record of 16.3 percent. As the government debated new public sector cuts to secure the cash lifeline protecting the country from a chaotic bankruptcy, residents once again hit the streets of Athens for anti-austerity protests.
Finance Minister Evangelos Venizelos says the Greek economy will contract 5.3 percent this year, much more than previously expected, but emergency measures such as a new blanket property tax will plug a revenue shortfall.
Traders, meanwhile, will now turn an eye to the talks in Wroclaw, Poland, where the eurozone's 17 financial chiefs and Geithner will huddle to come up with more lasting solutions to the debt crisis.
The European ministers are expected to finalize the terms to Greece's second massive bailout, which had initially been agreed in July but ran into difficulties after Finland demanded extra guarantees for lending Athens money. That sparked a gold rush of demands from other small eurozone nations.
Markets are hoping the European officials will be able to smooth over those differences and show greater unity of purpose.
Geithner's presence is indicative of the amount of international pressure the European officials are under to get their act together. The fear is that a credit crunch in Europe could spread through the interconnected global financial system and choke growth in economies far from the eurozone.
The eurozone countries are pinning much of their hopes on a new and improved rescue fund, which they want to give the power to buy government bonds on the open market. But changes to the fund require parliamentary votes in member nations, many of which will take weeks more to come through.
The ECB hopes the dollar loans will ease the pressure in the short term. The tenders will be conducted in October, November and December at fixed interest rates and for unlimited amounts as long as the bank demanding the loan has collateral.
Analysts noted a potential downside to the central bank's move. The ECB requires that the collateral be of very high quality, meaning anyone who uses the program might be stigmatized for being in a perilous financial position.
If the market learned which bank had tapped the facility, its shares would be punished and the bank might fail, said Peter Tchir, a former trader who now runs the hedge fund TF Market Advisors.Comment on this story
More likely, traders would have to guess which banks were borrowing dollars. That would be even worse, Tchir said, because "there's going to be speculation about banks that haven't even thought about using it."
The five central banks offering the loans had previously used such tenders to supply banks with liquidity during the credit crunch. The Fed in 2010 reopened a program to ship billions of dollars overseas in a bid to pump more short-term cash into the financial system and make sure banks have the dollars they need.
Daniel Wagner in Washington contributed to this report.