Top central banks around the world said on Wednesday that they would take steps to prevent a credit crunch among Europe's banks which are struggling to cope with the euro zone's debt crisis.

The US Federal Reserve, the European Central Bank and the central banks of Canada, Britain, Japan and Switzerland said in a joint statement they had agreed to lower the cost of existing dollar swap lines by 50 basis points from December 5.

The action was aimed at preventing credit markets from seizing up. European banks already are finding it difficult to get short-term funding amid investor doubts about the regions ability to deal with its debt crisis.

Other measures included setting up bilateral swap arrangements between the central banks so that any of them could provide liquidity in any of the other currencies. The swap arrangements are good through February 1, 2013.

The euro jumped on the announcement and European stocks extended gains to show a rise of more than 2 percent on the day. US stocks also rose sharply.

In a sign of growing global credit strains, China's central bank cut the reserve requirement ratio for its commercial lenders on Wednesday for the first time in nearly three years.
The move reduces the amounts that banks must keep in reserve and frees up funds for lending to cash-strapped small firms.

There are increasing concerns the global economy is losing steam as Europe's two-year-old sovereign debt crisis continues to fester and that risks of recession are rising.

Analysts said it was encouraging that the central banks were stepping in to offer assurances about liquidity. 'It feeds into the idea that policymakers are at least beginning to address the problem,' said Mark Cliffe, chief economist with ING Group.

'With the dire scenarios doing the rounds the last few days, it's all the more important they step in with aggressive measures to support the banking system and show they're beginning to confront the financing problems of the sovereigns as well.'     

But others noted that, while the central bank action is helpful, there is still a need for policymakers in Europe to deal with their core problems and markets are unlikely to settle down until they do so.

'It is supportive,' said Mark Thomas, head of Energy Europe, Marex Spectron in London. 'Difficult to predict for how long.'     

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

The surprise coordinated move by central banks was aimed at preventing global financial markets from coming under pressure that could potentially lead to a credit freeze.

'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 typically stilted language.  - Reuters