Markets boom stalls after short run
A rally on global markets stalled after euphoria over major central banks’ co-ordinated cut to borrowing costs wore off and investors sought confirmation that European leaders will next week deliver a long-term solution to the debt crisis.
Markets had jumped when the central banks of Europe, the US, Britain, Canada, Japan and Switzerland made it cheaper for banks to borrow dollars, helping them to operate smoothly at a time of tight credit. China’s central bank also acted to release money for lending and shore up growth by lowering bank reserve levels for the first time in three years.
Worries about Europe’s financial system and the European Central Bank’s reluctance to intervene heavily in bond markets have seen borrowing rates rise for European countries in recent weeks. That raised fears of a global credit crunch of the type that plunged the global economy into recession in 2009.
As a result of the central banks’ action, commercial banks in the EU and four other countries will now be able pay less to borrow dollars, the currency of international trade.
But analysts said that the decision might only have a short-term effect and does nothing to solve the underlying problem of an enormous government debt in Europe. Investors say the real boost to the markets might come only if European leaders announce a dramatic action at the summit on debt crisis next week.
European Central Bank chief Mario Draghi hinted the bank was ready to play a bigger role in the resolution of Europe’s debt crisis, but only after the 17 euro economies align their budgetary policies more closely.
Although the stock rally waned, bonds continued to perform strongly on hopes that European leaders will agree to some new support for weaker states, such as Italy, in exchange for tighter controls over their spending.
