This article is more than 8 years old

This article is more than 8 years old

The world's major central banks announced concerted emergency measures to underpin fragile eurozone banks and prevent the global financial system from freezing up.

In a clear sign that policymakers fear the downturn in the eurozone risks spiralling into a fresh credit crunch – where banks stop lending – they announced "co-ordinated central bank action to address pressures in global money markets".

Stock markets around the world surged after policymakers said they would cut the interest rate on emergency dollar loans to cash-strapped banks by 0.5 percentage points and extend the scheme until February 2013.

They will also establish "temporary bilateral liquidity swap arrangements" between one central bank and another, allowing liquidity to be provided at short notice in any currency "should market conditions so warrant".

"At least they've got their finger on the panic button," said Graham Turner, of GFC Economics in London. "There's an awful lot that central banks can do and this shows that they're not going to sit idly by and let the whole thing implode."

The European Central Bank, which has come under intense pressure over its role in the eurozone crisis, said it would now be able to provide liquidity to struggling banks in yen, sterling, Swiss francs and Canadian dollars if necessary.

The FTSE 100 index rose 168.42 points to close at 5505.42 after the announcement, a gain of 3.16% – the biggest one-day rise since 6 October. In New York, the Dow Jones industrial average was up 385 points by mid-afternoon.

The joint action was reminiscent of autumn 2008, when central banks came together to slash interest rates and inject liquidity into financial markets in the wake of the collapse of Lehman Brothers.

Banking analysts have been warning for some time that eurozone banks, which must reconcile their finances before the end of the year, are running short of dollars to pay US creditors.

Jeremy Cook, chief economist at foreign exchange company World First, suggested that central bankers had tired of European leaders' failure to fix the euro crisis. "Cutting swap costs is the equivalent of interest rate cuts," he said. "This may have been a signal that the money markets were a short shove away from complete collapse.

"Clearly the world's central bankers have had enough of all the political mud-slinging and intransigence and they've decided to take the situation by the scruff of the neck."

With US banks heavily exposed to the eurozone, Washington has also been exasperated as European politicians have failed to cobble together a comprehensive solution to the sovereign debt crisis.

US treasury secretary Tim Geithner said: "We welcome and support the actions taken by central banks around the world today to help ease pressure on the European financial system and help foster the global economic recovery."

But Jacob Funk Kirkegaard, research fellow at the Peterson Institute in Washington, said: "I wouldn't read too much into these enormous spikes in the markets; this action doesn't solve Europe's fundamental problems."

Sir Mervyn King, governor of the Bank of England, chaired the teleconference involving six central banks at which the measures were agreed in his capacity as chairman of the economic consultative committee of the Bank of International Settlements – the club of international central bankers.

The Bank joined the Federal Reserve, the Bank of Japan, the ECB, the Bank of Canada and the Swiss National Bank in making the announcement.

Central banks have become increasingly nervous as doubts about the future of the euro have pushed up the cost of funding for banks whose balance sheets have already been ravaged by the 2008-09 credit crunch and recession. They fear that if financial institutions rein in credit as a result, it will hit ordinary consumers and businesses and threaten a worldwide double-dip recession.

"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 central banks said in a joint statement.

UK chancellor George Osborne said in his autumn statement on Tuesday that the Treasury and the Bank were involved in contingency planning to prepare the economy and banks for a collapse of the euro.

There is already evidence that the euro crisis has hit business and consumer confidence and cut off financing for international trade.

Trade growth stalled in almost every major economy in the autumn as the crisis in the eurozone hammered business confidence, according to the Organisation for Economic Co-operation and Development, the Paris-based thinktank, raising the spectre of a worldwide downturn.

The industrialised G7 countries and the Brics – Brazil, Russia, India and China – saw a 1% decline in imports in the third quarter.

Among the major economies, the OECD said only Japan saw a strong rise in trade, but that was partly a bounce-back from the steep decline earlier in the year as industry recovered from the impact of the earthquake in March. Canada also scored a rise in exports, but its imports declined.