The European Central Bank said it will coordinate with the U.S. Federal Reserve, the Bank of England, the Bank of Japan and the Swiss National Bank to offer three-month dollar loans to banks through the end of this year. There was no separate statement from the Fed.
The coordinated effort aims to prevent Europe's debt crisis from derailing the global economy's rebound from recession, a topic that will dominate talks between U.S. Treasury chief Timothy Geithner and his European counterparts at a meeting beginning Thursday night and running through Saturday in Poland.
European banks have seen their shares sink and some have had trouble getting loans from each other recently because of possible huge losses from their holdings of troubled European government bonds.
When a bank is rumored to be in danger of suffering large losses, other banks will stop lending to it for fear of not getting their money back - a scenario that created the global credit crunch in 2008. Ultimately, the threat to the wider global economy is that banks will stop lending to businesses, stifling growth.
Stocks, particularly banking shares, and the euro rallied Thursday on hopes the dollar loans will relieve the funding pressures.
The program will likely prevent a panic for the next few months, but it's only a first step, said Mark McCormick, a currency strategist at Brown Brothers Harriman. "You're warding off contagion and crisis, but it's not going to solve the problem, which is too much debt," McCormick said, but added it was smart for the central banks to address the problem early.
Indicators of banking stress now are the worst they have been in three years, he said, but they remain better than they were before the U.S. investment firm Lehman Brothers failed exactly three years ago - on Sept. 15, 2008 - setting off a worldwide credit crunch.
Financial markets have been hugely volatile for weeks on fears that Europe's debt crisis will spin out of control and threaten Europe's banking sector. Moody's ratings agency this week downgraded two major French banks on those concerns.
McCormick said the long-term impact of Thursday's move was uncertain.
"I think a lot of people took it as a red flag, but it's more of a pre-emptive strike to get ahead of the stresses that we had when Lehman failed," he said.
Markets and the euro currency were buoyed by Thursday's news. The 17-nation euro currency surged to a daily high of $1.3934 before retreating slightly to $1.3858. Shares in French bank BNP Paribas jumped 13.4 percent while Societe Generale gained 5.4 percent. Traders had singled them out in recent days as being particularly exposed to Greece's bad debts.
The markets needed the boost, because news out of Greece and Switzerland was particularly downbeat Thursday.
The Greek finance minister warned that the country must brace for a fourth year of recession, and data showed unemployment had hit a new high of 16.3 percent. As the government debated new public sector cuts to secure the cash lifeline protecting Greece from a chaotic bankruptcy, residents once again hit the streets of Athens to protest the austerity measures.
Finance Minister Evangelos Venizelos says the Greek economy will contract 5.3 percent this year, much more than previously expected, but emergency measures such as a new property tax will plug a revenue shortfall.
Swiss banking giant UBS, meanwhile, revealed that a rogue trader had caused it an estimated loss of $2 billion, forcing the bank to lower its earnings forecast. UBS shares slumped 11 percent and the news bolstered the view that trading needs to be more tightly regulated.
Traders will now focus on the talks in Wroclaw, Poland, where the eurozone's financial chiefs and Geithner are huddling to come up with more lasting solutions to the debt crisis.
The European ministers are expected to finalize the terms of Greece's second massive bailout, which had initially been agreed upon in July but ran into difficulties after Finland demanded extra guarantees for lending Athens money. That sparked a gold rush of demands from other small eurozone nations.
Markets are hoping the European officials will be able to smooth over those differences and show greater unity of purpose.
Geithner's presence is indicative of the amount of international pressure the European officials are under to get their act together. The fear is that a credit crunch in Europe could spread through the interconnected global financial system and choke growth in economies far from the eurozone.
The eurozone countries are pinning much of their hopes on a new and improved rescue fund, which they want to give the power to buy government bonds on the open market. But changes to the fund require parliamentary votes in member nations, many of which will take weeks more to come through.
The ECB hopes the dollar loans will ease the pressure in the short term. The tenders will be conducted in October, November and December at fixed interest rates and for unlimited amounts as long as the bank demanding the loan has collateral.
If the market learned which bank had tapped the facility, its shares would be punished and the bank might fail, said Peter Tchir, a former trader who now runs the hedge fund TF Market Advisors.
More likely, traders will have to guess which banks were borrowing dollars. That would be even worse, Tchir said, because "there's going to be speculation about banks that haven't even thought about using it."
In Washington, Christine Lagarde, managing director of the International Monetary Fund, called the central banks' move "exactly what is needed" to demonstrate a willingness to engage in a coordinated response to the European debt crisis.
"It shows they will do what it takes to maintain stability in the financial system," Lagarde said in an interview on CNBC TV.
The swap arrangement was one put into place in May 2010 when the European debt crisis first flared up. That swap arrangement replaced a swap facility that began in December 2007 to handle the global financial crisis but was allowed to expire in February 2010.
The way the swap works, the Fed provides dollars requested by the ECB, which distributes that money to commercial banks in Europe. There is no cap on the amount of dollars the Fed can provide. The Fed will receive euros to hold in return for the dollars and will also receive interest payments on the dollars it provides to the ECB.
The Fed's exposure will be to the ECB, not to the commercial banks, and the ECB will be obligated to repay the Fed in dollars when the swaps expire.