European stocks rallied for their longest stretch of gains in seven weeks as the Federal Reserve and five other central banks lowered the cost of dollar funding and China cut its reserve ratio for banks.
The Fed, Bank of Canada, Bank of England, Bank of Japan, European Central Bank and Swiss National Bank agreed to reduce the interest rate on dollar liquidity swap lines by 50 basis points and extend their authorization through Feb. 1, 2013.
Finance ministers of the 27-nation European Union are meeting in Brussels today to seek agreement on how to temporarily guarantee banks’ bond issuance in order to improve funding conditions for lending. EU leaders agreed last month to provide the guarantees to restore investor confidence in banks.
Basis swaps allow banks to borrow in one currency, while simultaneously lending in another. So the US Fed "swaps" dollars for worthless Euros, so European Banks may borrow dollars from the ECB.
Bloomberg reports ECB Coordinated Policy Action Is ‘Big Deal,’ Blanchflower Says:
The ECB’s measure is a “really big deal,” according to Dartmouth College Professor David Blanchflower. “The fact that these central banks have acted together and said we’ll backstop banks is really big news,” Blanchflower, a former member of the Bank of England’s Monetary Policy Committee, said today at the Bloomberg Markets 50 Summit in New York.
Here is an interesting chart on ZeroHedge that shows what happened the last time there was coordinated swap-line action.
Watch out below!