Central banks help Europe avert crisis, but for how long?
— -- Stocks soared Wednesday after six major central banks agreed to aid European banks, an effort designed to stimulate economic growth in Europe and prevent its debt crisis from unhinging the global economy.
But Europe's woes will continue to rattle U.S. markets — and threaten the fragile U.S. economic recovery — until the euro crisis is settled.
"It buys time. It keeps credit flowing. And it averts a European banking crisis — for now," says Andrew Busch, global currency and public policy strategist at BMO Capital Markets.
Just how much time the central banks are buying is an open question. A European Union summit is scheduled next Thursday and Friday in Brussels to try to fix a debt crisis that began two years ago in Greece and is now spreading to countries with stronger finances.
"We are now entering the critical period of 10 days to complete and conclude the crisis response of the European Union," EU Monetary Affairs Commissioner Olli Rehn said. "There is no one single silver bullet that will get us out of this crisis."
The crisis that central banks are trying to contain: Banks and lenders, fearing that they would not get paid back, have cut off the cash spigot to European banks, which are hobbled by their massive holdings in eurozone government debt. U.S.-based money market funds, for example, have severely cut back on their financing of European banks.
As loans to European banks have dried up, so has their ability to lend and keep the European economy going. The nightmare scenario: a meltdown like the collapse of Lehman Bros. in 2008. That, in turn, could push Europe deeper into recession and force the abandonment of the euro, which could put further pressure on the U.S. economy.
The Federal Reserve, coordinating with the Bank of England, the European Central Bank (ECB), the Bank of Japan, the Bank of Canada and the Swiss national bank, reduced the cost of short-term dollar loans to banks, called liquidity swaps, by a half percentage point starting Monday
The central banks' move ensures that European banks will be able to borrow dollars from their own central banks and continue to lend to households and businesses. "The key here is that all the governments understand that they need to provide the banking system with funds to operate," says Gary Motyl, chief investment officer of Templeton Global Equity Group.
U.S. investors sent the Dow Jones industrial average up 490.05 points, or 4.2%, its seventh-best point gain ever, and its biggest rise since March 2009.
The German DAX index leaped nearly 5%.
"Finally, global action!" said Busch. "This is an important step. It shows the world can work in unison to address the global funding issue."
Absent Europe's troubles, the U.S. stock market would probably be higher than it is now. Interest rates are low, the economy is growing, and corporate profits are robust. Private employers added 206,000 workers in November, more than economists had expected, ADP Employer Services reported Wednesday. And in a surprise move, China eased banks' reserve requirements to stimulate its economy.
But many investment professionals warned that the eurozone crisis is far from over.
"Europe is still in crisis-containment mode, not crisis-resolution mode," says Samy Muaddi, vice president at T. Rowe Price. "We still have the same concerns we did yesterday."
Related Stories
ABC News Live