Global stocks rise as central banks agree liquidity plan

Markets reacted positively today after the world's major central banks acted jointly to provide cheaper dollar liquidity to starved European banks facing a deepening credit crunch.

The surprise emergency move by the US Federal Reserve, the European Central Bank, the Bank of Japan and the central banks of Britain, Canada and Switzerland recalled coordinated action to steady global markets in the 2008 financial crisis.

The euro and European shares surged on the news, which came after euro zone finance ministers agreed to ramp up the firepower of their bailout fund but acknowledged they may have to turn to the International Monetary Fund for more help. Gold surged to its highest price in almost two weeks the after the move. Spot gold rose more than 2 per cent to $1,749.54.

In the United States, the Dow Jones industrial average closed up 484 points, its biggest gain since March 2009.

"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 banks said in a statement.

Speaking this evening, the Taoiseach said the first priority must be "to use the existing instruments and decisions to their full potential so that the markets can be convinced that European leaders are fully committed to defending and protecting their currency".

"The Government has been consistent in arguing that the only way to overcome a financial market panic like this is to deploy overwhelming financial firepower to support countries pursuing sound economic policies," he told the Financial Services Ireland annual dinner.

"That is why I believe that the ECB needs to play a bigger role in resolving this crisis. Promoting financial market stability and combating inflation should not be viewed as inconsistent goals," Enda Kenny said.

In the United States, the Fed noted banks were not now having difficulty getting funds in short-term funding markets. But if conditions deteriorate, the US central bank said it has "a range of tools available" and would deploy them as necessary.

The ECB said, from next Monday, it would make it cheaper for banks to get US dollar liquidity when they need it. They are also taking steps to ensure banks can get ready money in any currency if market conditions warrant.

Mr Kenny earlier welcomed the moves, which had said could help save the euro.

“I understand that there has been an initial reaction that has been very beneficial for markets, though we’ve had that in the past,” said Mr Kenny.

“But it is welcome. It leads now to a real focus by political leaders on the political crisis in the euro zone, and I hope that the deliberations over the next week will lead to a point where there can be clarity and decisiveness about this, because it is so important for every country in the euro zone, the EU and beyond.”

Major European bourses reacted positively to the move.

The FTSEurofirst 300 index of top European shares closed 3.3 per cent higher at 979.5 points. In London, the FTSE 100 closed up 3.16 per cent while in Germany and France, the DAX and CAC40 closed up 4.98 per cent and 4.22 per cent respectively.

In a related move, Italy's central bank started emergency cash tenders for banks which have been squeezed particularly hard in recent weeks as Rome's borrowing costs have soared towards 8 per cent, a level seen as unaffordable in the long term.

"We are now entering the critical period of 10 days to complete and conclude the crisis response of the European Union,"

EU economic and monetary affairs commissioner Olli Rehn said as EU finance ministers met in Brussels.

Two years into Europe's debt crisis, investors are fleeing the euro zone bond market, European banks are dumping government debt, south European banks are bleeding deposits and a recession looms, fuelling doubts about the survival of the single currency.

Euro zone leaders have agreed belatedly on one half-measure after another but have failed to restore confidence and now face a crunch moment at a December 9th summit in seen by some analysts as a make-or-break moment for the euro.

Finance ministers agreed last night on detailed plans to leverage the European Financial Stability Mechanism (EFSF), but could not say by how much because of rapidly worsening market conditions, prompting them to look to the IMF.

Italian and Spanish bond yields resumed their inexorable climb towards unsustainable levels today, as markets assessed the rescue fund boost as inadequate.

The 17-country Eurogroup last night adopted detailed plans to insure the first 20-30 per cent of new bond issues for countries having funding difficulties and to create co-investment funds to attract foreign investors to buy euro zone government bonds.

Both schemes would be operational by January with about €250 billion from the euro zone's EFSF bailout fund available to leverage after funding a second rescue programme for Greece, Eurogroup chairman Jean-Claude Juncker said.

The aim was for the IMF to match and support the new firepower of the EFSF, Mr Juncker told a news conference.

But with China and other major sovereign funds cautious about investing more in euro zone debt, EFSF chief Klaus Regling said he did not expect investors to commit major amounts to the leveraging options in the next days or weeks, and he could not put a figure on the final size of the leveraged fund.

"It is really not possible to give one number for leveraging because it is a process. We will not give out a hundred billion next month, we will need money as we go along," he said.

The Eurogroup ministers also agreed to release their portion of an €8 billion aid payment to Greece, the sixth instalment of €110 billion of EU-IMF loans agreed last year and necessary to help Athens stave off the immediate threat of default. Mr Juncker said the money would be released by mid-December, once the IMF signs off on its portion early next month.

Agencies