Markets rally after eurozone rescue mission by world's central banks

Five central banks take steps to funnel cash to eurozone commercial banks by year's end. Their aim? Avert a funding freeze – and perhaps another global banking crisis tied to bad debt.

By , Staff writer

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    A worker cleans the paint-splattered entrance of the Bank of Greece, as university students carry their flag after a protest in central Athens on Thursday, Sept. 15.
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Central banks from around the world banded together Thursday to calm fears of financial chaos in Europe, pledging loans designed to prevent a short-term funding freeze for private-sector banks in the eurozone.

The plan to offer three-month loans buoyed anxious investors, sending stock markets up globally. The Dow Jones Industrial Average, for example, rose 1.7 percent to close above 11400.

The move doesn't put an end to Europe's debt crisis, but it does appear to buy time as governments seek a longer-term solution.

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The European Central Bank said the action – in which it is joined by the US Federal Reserve, the Bank of Japan, the Bank of England, and the Swiss National Bank – will include three "liquidity-providing operations" that funnel cash to commercial banks before the end of the year.

European banks have seen their share prices dive in recent weeks, amid worries that their holdings of some European government debts will face defaults or "haircuts" (losses as debts are restructured). The biggest risk of default remains the debt of Greece, but the perception of credit risk has risen for larger nations, including Italy.

Shares in French bank BNP Paribas, for one, climbed 13 percent after the announcement.

A key worry is that a Greek debt default, in addition to saddling banks with losses, would raise uncertainty about the larger ability of eurozone nations to maintain their currency union and manage their debts.

It also can create uncertainty about the financial health of individual banks – hobbling their ability to obtain short-term loans. Other banks will stop lending to one another for fear of not getting their money back – a scenario that created the global credit crunch in 2008.

Despite the sigh of relief rippling through stock markets Wednesday, economists say the central banks are at best providing a little breathing space for Europe's banks and governments.

"Even if banks in the euro-zone have less of a liquidity problem on their hands today than they did in late 2008 ... they have a greater solvency problem," writes John Higgins of Capital Economics. "The cost of insuring against a default by the banks is much higher."

"The implications for the United States are enormous," said Fareed Zakaria, editor at large of Time magazine and host of CNN's "Fareed Zakaria GPS." Europe faces hard choices, he says, either to restructure eurozone debts or to allow the exit of one or more nations from the currency union. "We trade more with Europe than with any other part of the world," he says, so the ripple effects of Europe's troubles could be large.

Material from wire services was used in this report.

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