Central banks open the U.S. dollar taps

The Bank of Canada and five other central banks around the world are makinga co-ordinated effort to improve the flow of money through the global economy.

The Bank of Canada, the European Central Bank, U.S. Federal Reserve, Bank of England, and the central banks in Japan and Switzerlandpledged to cut the rate on what's known as "dollar swap lines." That's the amount of money that banks pay in order to get their hands on different currencies so they can then loan them out to customers.

In plain terms, the plan is to make U.S. dollars more available. They will do that by lowering the rate at which the world's banks have to borrow to get their hands on U.S. dollars.

Foreign banks get U.S. dollars by borrowing them from their own central banks, which then get them from the U.S. Federal Reserve.

'This is a step forward' Finance Minister Jim Flaherty

Because of the uncertainty in the economy, other banks have been less willing to loan anything to wobbly European banks. That means the latter have to paya premium to get the cash, and that's ultimately passed on to consumers.

The premium that European banks must payto get short-term U.S. dollar loansroseto 162 basis points recently. That's the highest they've been since Lehman Brothers collapsed in 2008. In the minutes after the announcement, the rate had already dropped to 145 basispoints.

Finance Minister Jim Flaherty called the central bank co-operation a "positive" indicator.

"One of the things that we see when there's a great deal of uncertainty is a tightening of credit and that has been a challenge particularly with respect to U.S. dollars and some of the European financial institutions. This is a step forward," he told reporters after a speech to a business audience in New York.

Rules in place until 2013

Technically, the banks pledged to cut the rate to the "dollar overnight index swap rate plus 50 basis points, or half a percentage point."

They pledged to keep the new rules in place until February 2013 at least.

Making dollars cheaper to obtain for European banks appears to be just the tonic that investors needed as world stock markets soared on the news.

The Dow Jones industrial average closed with a gain of471 points, or 4.2 per cent,at 12,045.68.London's FTSE gained 3.16 per cent and Frankfurt's DAX index gainedfive per cent.

The banks also said they'd take steps to ensure banks can get ready money in any currency if market conditions warrant.

The Canadian dollar moved higher after the announcement, closing up 0.95 of acent at 98.01 cents US.

Although investors cheered the move in the short term, experts say the fundamental problems of massive sovereign debt loads remain.

"It does not address the heart of the crisis, which is the risk European banks will have to take further writedowns on sovereign debt and have to pull back on activities in euros," CIBC economist Avery Shenfeld said."So this doesn't address the risk to their overall solvency."

Flaherty reiterated that on the broader question of sovereign debt, Europe is rich enough to help itself and should not seek help from the International Monetary Fund, often called the bank of last resort for poorer economies.