FRANKFURT, Germany - The central banks of the wealthiest countries, trying to prevent a debt crisis in Europe from exploding into a global panic, swept in Wednesday to shore up the world financial system by making it easier for banks to borrow American dollars.
Stock markets around the world roared their approval. The Dow Jones industrial average shot up more than 400 points. The stock market rose more than 5 percent in Germany and more than 4 percent in France.
The action represented the most extraordinary coordinated effort by the central banks since they cut interest rates together in October 2008, at the depths of the financial crisis.
But while the steps should ease borrowing for banks, they do little to solve the long-term debt problem in Europe, leaving markets still waiting for a permanent fix. European leaders gather next week for a summit.
The European Central Bank, which has been reluctant to intervene to stop the growing crisis on its own continent, was joined in the decision by the Federal Reserve, the Bank of England and the central banks of Canada, Japan and Switzerland.
And China, which has the largest economy in the world after the European Union and the United States, reduced the amount of money its banks are required to hold in reserve, another attempt to free up cash for lending.
The display of worldwide coordination was meant to restore confidence in the global financial system and to demonstrate that central banks will do what they can to prevent a repeat of 2008.
That fall, fear settled in after the collapse of Lehman Brothers, a storied American investment house. That caused banks around the world to severely restrict lending to each other. The credit freeze triggered panic among investors, which resulted in a meltdown of stock markets.
On Oct. 8, 2008, the ECB and central banks in the United States, England, China, Canada, Sweden and Switzerland cut interest rates together after a series of high-stakes phone calls.
The Dow fell that day, during the worst of the financial meltdown. But that action, like Wednesday's, was a signal from the central banks to the financial markets that they would be players, not spectators.
Three years later, investors have been nervously watching Europe to see whether they should take the same approach sell first, ask questions later. World stock markets have been unusually volatile since this summer.
The European crisis, which six months ago seemed focused on the relatively small economy of Greece, has since metastasized. It now threatens the existence of the euro, the common currency used by 17 countries in Europe.
But beyond that, the crisis has the potential to wreak worldwide economic havoc. Fear in financial markets could cause lending to dry up, both from banks to businesses and from banks to each other.
There have been early signs, particularly in Europe, that it is becoming more difficult to borrow money especially as U.S. money market funds scale back their lending to banks in the euro nations because of perceived risk from the debt crisis.
"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.
The joint effect will make it easier for banks around the world to get dollars if they need them. Loans made in U.S. dollars are important because dollars are the No. 1 currency for international trade.
In May 2010, as the European debt crisis started to bite, the Federal Reserve agreed to swap dollars for foreign currencies held by other leading central banks. The foreign central banks could then lend dollars to their banks.
That agreement was supposed to expire Aug. 1, 2012. Monday's announcement extends it six months, until Feb. 1, 2013.
Under the agreement, the central banks are reducing by half a percentage point to about 0.6 percent the rate they charge banks for short-term dollar loans. The lower rate is designed to get credit flowing again.
"It shows that policymakers are on the case," said Roberto Perli, managing director at the International Strategy & Investment Group, an investment firm. He said it has symbolic value even if it does not have a big impact on credit markets.
If it works, the rates on dollar loans will drop, and stock and bond markets will calm down. The banks' action is not a direct fix for the debt crisis in Europe, but it shows that the banks are able to take coordinated action to ease credit.
The decision to cut the interest charged on the dollar swaps was taken by the Federal Reserve following a video conference meeting held by Fed officials on Monday morning.
The Federal Open Market Committee, the Fed's policy-setting panel of board members from Washington and regional Fed bank presidents, approved the decision on a 9-1 vote. The president of the Fed's regional bank in Richmond, Va., voted no.
"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," U.S. Treasury Secretary Timothy Geithner said in a statement.
In New York, the stock market jumped at the opening bell and added to its gains throughout the morning.
The Dow was up 438 points at its highest, or more than 3 percent. Holding those gains would give the Dow its best day since Aug. 11. Wednesday's advance also swung the Dow from a loss for the year to a gain.
The high for the day also put the Dow within six points of 12,000. It has not closed at that level since Nov. 15.
Stocks closed 5 percent higher in Germany, 4.2 percent in France and 3.2 percent in Britain. European stocks had posted big gains earlier this week because investors saw hope that countries were nearing a way out of the European debt crisis.
Stock markets in Asia finished lower for the day. They closed before the Fed and other central banks announced their joint action at about 8 a.m., before European markets closed and an hour and a half before they opened in New York.
Borrowing costs for countries across Europe fell, an encouraging sign. The yield on benchmark 10-year national bonds fell 0.25 percentage points in Belgium, 0.2 points in Spain, 0.13 points in France and 0.06 points in Germany.
The yield on 10-year Italian bonds fell 0.06 points to 7.03 percent. The 7 percent level is significant because it is considered the point when a country's borrowing costs become unsustainable. Yields above 7 percent forced Ireland, Portugal and Greece to seek bailouts.
In the U.S., the yield on the 10-year Treasury rose to 2.09 percent from 2 percent late Tuesday. That is a sign that investors are willing to take money out of assets considered super-safe, such as U.S. government debt.
An out-of-control crisis in Europe would come just as the United States economy is beginning to gain steam. It grew at an annual rate of 2 percent in July, August and September, the strongest since late last year.
It will take more than that to bring down unemployment in the U.S., which has been stuck at about 9 percent for more than two years, but the U.S. has added jobs for 13 months in a row. The government's next read on unemployment comes out Friday.
In Europe, countries like Ireland, Portugal, Spain, Greece and Italy overspent for years and racked up annual budget deficits that have left them with backbreaking debt. Italy alone owes euro1.9 trillion, or 120 percent of what its economy produces in a year.
To go along with the monetary union created by the euro, European leaders have explored creating a fiscal union giving a central authority control over the budgets of sovereign nations.
There has also been talk of forming an elite group of nations using the euro to guarantee each other's loans. It would require fiscal discipline from any country that wants to join.
The ECB has extended unlimited amounts of short term credit to banks, but has balked at expanding a limited program to support the borrowing of troubled countries by buying their bonds on the secondary market.
One reason the ECB has resisted major action so far: It worries that bailing out free-spending countries would only encourage them to do it again, a concept known as moral hazard.
The ECB has also worried that injecting too much money into the European economy would trigger inflation. Its single mandate is price stability. By contract, the Fed has a dual mandate price stability and encouraging employment.
The coordinated action was a demonstration of how interconnected the world financial system is, and that the debt loads of countries like Italy and Greece are everyone else's problem, too.
Germany, for example, has resisted a proposal to have the euro nations issue joint bonds to calm the markets. Germans have bad memories of inflation going back to the Weimar Republic, for one thing. And Germans, who bear the brunt of any European bailout, want other countries to get their finances together on their own.
But Germany's economy depends heavily on exports, and if the euro collapses, weaker countries in Europe would be left with their own devalued currencies. If that happened, they couldn't buy as many German goods.
Across the Atlantic Ocean, the United States depends on Europe for 20 percent of its own exports. And if the debt crisis pulls Europe into a recession, that would drag down the U.S. economy just when it may be beginning to turn around.
Standard & Poor's, the credit rating agency, lowered its rating at least one notch Tuesday for the four largest banks in the U.S. Bank of America, Citigroup, JPMorgan Chase and Wells Fargo.
S&P was the agency that stripped the United States government of its top-notch rating this summer, when Congress was gridlocked over whether to raise the federal government's borrowing limit.
And China, one of the only places in the world where the economy is growing quickly, needs the U.S. and Europe both to stay healthy. Growth in Chinese exports has declined from 36 percent in March to 16 percent in October.
China will reduce the amount of money that its commercial lenders must hold in reserve by 0.5 percentage points of their deposits. It was the first easing of Chinese monetary policy in three years.