Central Banks Around Globe Move To Ease Fears

Leading central banks around the world took coordinated moves Wednesday to provide more liquidity in the global financial system and calm rising fears in Europe over access to credit. As Europe's sovereign debt crisis worsens, bank lending has tightened, and nervous investors are reluctant to make loans to European banks.

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STEVE INSKEEP, HOST:

NPR's business news begins with a surprising move by central banks.

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INSKEEP: The Federal Reserve took action this morning, along with the major central banks in Europe and Japan, to ease credit for commercial banks. This is an effort to free up funding for European banks battered by the eurozone's sovereign debt crisis. NPR's John Ydstie reports.

JOHN YDSTIE, BYLINE: European commercial banks have been having trouble in recent days obtaining the U.S. dollars necessary to meet their obligations. One reason is that U.S. mutual funds which lent to European banks have stopped doing so because of worries the banks might fail. Another source of funding - loans from other banks - is also drying up, says Edwin Truman, a former assistant secretary of the Treasury for International Affairs.

EDWIN TRUMAN: They have trouble borrowing from each other because they don't trust each other - if you want to put it that way - to be able to pay back these funds.

YDSTIE: So the commercial banks turn to the European Central Bank to borrow the dollars they need. The ECB borrows those dollars from the Federal Reserve, which gets euros in exchange. When the commercial banks in Europe borrow those dollars from the ECB, the Fed gets the interest. Today, the Fed - in concert with the ECB and other major central banks - cut the interest on the dollars loaned in half to .5 percent. The idea is to help out Europe's struggling commercial banks. Ted Truman says it will be only marginally helpful.

TRUMAN: But I think it's important to signal that the central banks around the world are worried about the financial system, and I think it is an important signal, A, that they are worried, and B, that they are cooperating.

YDSTIE: Truman says the move by the Fed to help European banks also helps US banks, many of whom have significant loans to European banks. Financial markets reacted very positively to the news. Major US indexes rose more the 3 percent. John Ydstie, NPR News, Washington.

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