Stock markets partially recovered from a week of losses after a coordinated effort Wednesday by central banks around the world to cut interest rates as a joint response to the global financial crisis.
Investors breathed a short sigh of relief, but are unsure how long the break from bad news will last
The US Federal Reserve said it was cutting its key rate by 50 basis points to 1.5 percent. China, the European Central Bank and central banks in Britain, Canada, Sweden and Switzerland also cut rates in the coordinated response that analysts had been demanding. The ECB dropped its interest rate to 3.75 percent.
The decision was taken in coordination with central banks in Britain, Canada Sweden, Switzerland and the United States, the ECB said in a statement.
The banks highlighted in a joint statement that they had cooperated in "unprecedented joint actions such as the provision of liquidity to reduce strains in financial markets" during the crisis.
The ECB said "the Bank of Japan expresses its strong support of these policy actions" although Tokyo did not take part in the joint action which followed unprecedented measures taken in Washington and London to battle the international financial crisis.
The situation didn't look good on Wednesday morning
"Throughout the current financial crisis, central banks have engaged in continuous close consultation and have cooperated in unprecedented joint actions such as the provision of liquidity to reduce strains in financial markets," the ECB statement said.
The cuts followed days of calls for concerted action by economists and world leaders after repeated attempts by central banks to inject liquidity into world markets failed to halt a crisis of confidence.
"The central banks of the world have finally woke up to the gravity of the current situation," Charles Diebel, the head of interest rates strategy at Nomura, told Reuters news agency. "This is a major step to convincing the world that they are serious about stabilizing."
Share prices around the world were plunging ahead of the cuts despite Britain announcement of a 50 billion pound ($87 billion, 64 billion euro) partial nationalization of the country's eight main banks as well as a 200 billion pound credit line extended to banks.
Brown promotes EU-wide plan
Britain announced a 250 billlion pound bank rescue backage
When presenting his country's bank rescue package, British Prime Minister Gordon Brown proposed a "European-wide funding plan" to ease the financial crisis' effects. Though he did not give details on the proposal immediately, a pan-European bail-out fund was rejected by EU leaders over the weekend.
Addressing a press conference on the British rescue package, Brown said he had spoken earlier Wednesday to French President Nicolas Sarkozy, whose country currently holds the rotating European Union presidency.
"Countries are tested in difficult times," Brown said. "These problems certainly started in the United States of America but they are having a big impact on our and on others' financial systems."
IMF: More losses on the way
The International Monetary Fund (IMF) warned on Tuesday that US financial sector losses could total $1.4 trillion as the housing crisis, adding that the center of the turmoil has yet to reach its peak.
Banks will go under, and financial institutions will face an "inevitable" restructuring period as they battle to raise the capital needed to bolster their own balance sheets, the IMF wrote in its annual financial stability report.
France blames US for banking crisis
Lagarde said the US was wrong to allow Lehman Brothers to fall
French Finance Minister Christine Lagarde on Wednesday traced the start of the global financial meltdown to the United States' "dramatic" decision allow Lehman Brothers bank to go under.
Lehman sought bankruptcy protection last month, after failed talks to find a buyer for the $600 billion Wall Street investment giant. The US government then decided not to step in and save it.
"As far as I am concerned, that was a mistake," Lagarde said, in an interview with RTL radio, complaining that a government bail-out would have reassured markets. "When you let one domino fall, the others follow."
The collapse of Lehman Brothers, one of Wall Street's most established banks, sparked turmoil on financial markets across the world that has it roots in a wave of loans to US homebuyers with spotty credit histories.
Once people began to default on the subprime mortgages offered to them by banks, a chain reaction of chaos followed. Housing foreclosures sent home values plunging, and the US housing market fell apart. Meanwhile the loans themselves had been re-packaged as complicated investment products and resold.
As banks saw the extent of their investments in these bad debts, they had less money for new loans and their share prices began to fall.