Central banks around the world, on Sunday night, announced that they would restore currency swap agreements that were introduced during the financial crisis, in an attempt to ease the strain on banks caused by the European sovereign debt crisis.
The joint decision by the Federal Reserve, the European Central Bank, the Bank of England, the Bank of Canada, and the Swiss National Bank was part of an audacious coordinated package by global authorities to combat escalating financial market tensions, including an emergency funding facility worth as much as €720bn in loan guarantees and credits. The Bank of Japan on Monday also approved similar swap agreements.
Further, ”The European Central Bank will buy euro zone government bonds to help support fractured markets, abandoning resistance to full-scale asset purchases in light of Greece‘s debt crisis. The ECB said in a statement that the step, dubbed the ‘nuclear option‘ by many economists, was justified because of government promises to meet strict budget targets and step up consolidation efforts.
The scope of the ECB‘s action surprised some central bankers outside Europe. The decision marks a significant escalation for the ECB, which previously had been reluctant to follow the US Federal Reserve and Bank of England in buying even government debt in the open market, it will buy government and private debt on ”dysfunctional” European markets as part of a concerted show of force by European authorities to persuade financial markets that they are, in fact, responding to the spreading sovereign debt crisis in the euro zone.
By pledging ¤500bn ($670bn) of loans and loan guarantees to any euro zone countries needing funds, plus about 250 billion euros from the International Monetary Fund, European policymakers have thrown a huge amount of money at the problem.
But doubts remain about policymakers‘ will to implement the steps aggressively, and root causes of instability in the euro zone -- including big divergences among economies -- have not been resolved. So markets will probably remain worried about the long-term prospects for the zone, and it seems unlikely that euro assets will stage an extended rally back to their levels of early this year.[
The Group of Seven finance ministers and central bank governors, who consulted at least twice by conference call since Friday, sought to assuage those doubts, putting the weight of governments that control about two thirds of the world economy behind the European efforts.
”Together these measures will make a strong contribution to financial stability, and we will continue to work together to support stability, recovery and growth,” the G7 said in a statement.