A day after central banks around the world intervened to try to create liquidity in markets that were drying up, the Prime Minister’s office confirmed global economies were once again in the grip of a credit crunch.
A spokesman for the Prime Minister told the Telegraph: “We are experiencing a credit crunch and that central bank action is about trying to mitigate the effects of that credit crunch.
“They are ensuring they have the capacity to take action. The eurozone debt crisis has led to growing fears in financial markets about the stability of major European banks.”
Yesterday the Bank of Canada, Bank of England, Bank of Japan, European Central Bank, Federal Reserve and Swiss National bank, all moved to improve liquidity with a number of actions.
The banks all agreed to lower the cost of existing temporary US dollar liquidity swap arrangements by 50 basis points, with the new rate the US dollar overnight index swap (OIS) rate plus 50 basis points.
The banks will also establish temporary bilateral liquidity swap arrangements so that liquidity can be provided in each jurisdiction in any of the their currencies. The changes will commence on 5 December.
“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 Bank of England said.
Markets around the globe soared after the announcements.
