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From NPR News, this is ALL THINGS CONSIDERED. I'm Guy Raz.
MELISSA BLOCK, HOST:
And I'm Melissa Block. The central banks of some of the world's most important economies banded together today in an effort to ease the financial strain in Europe. The plan they announced is designed to make it easier for troubled European banks to get inexpensive loans in dollars. The announcement helped send stock prices soaring here in the U.S. and around the world. NPR's Jim Zarroli begins our coverage.
JIM ZARROLI, BYLINE: Today's move was carried out by a kind of financial convoy involving the Federal Reserve, the European Central Bank and the central banks of Canada, Japan, Switzerland and the United Kingdom. It involves something called a swap arrangement, a tool that central banks have been using in recent years to lend each other money. Joseph Gagnon is a senior fellow at the Peterson Institute for International Economics.
JOSEPH GAGNON: And that's why it's a swap because the Fed gives them dollars, they give us euros.
ZARROLI: Swap arrangements were used heavily in 2008 as a way of stabilizing the financial system after the Lehman Brothers collapse and central banks are increasingly turning to them again. They're doing so at a time when the global economy is slowing and many investors are taking money out of Europe and putting it in dollar denominated assets like U.S. government bonds, which are widely seen as safe havens. This has created a huge demand for dollars and that's a big potential problem for a lot of commercial banks, says former Federal Reserve board member Randall Kroszner.
RANDALL KROSZNER: There are a lot of banks in Europe that finance themselves using dollars and have a lot of demand for dollars for themselves and for their customers.
ZARROLI: The idea behind today's move is to make dollars more available to central banks at a lower cost. That way they'll be able to keep lending to commercial banks and commercial banks, in turn, will be able to keep lending to businesses. It's a way of easing the strains on the banks and keeping the financial system liquid, says Joseph Gagnon.
GAGNON: I think they want to see that banks in Europe will be able to get the funding they need to run their businesses as usual and that the whole banking system and supply of credit, flow of credit, won't freeze up.
ZARROLI: The move announced today is considered relatively risk-free for the Federal Reserve. It's essentially lending money to the central banks themselves, which have vast resources of their own, and not to the troubled commercial banks so it won't be on the hook for anyone's bad debt. The announcement today, coupled with strong employment news, helped send stock prices sharply higher and pushed U.S. stocks back into positive territory for the year. Many investors are clearly hoping that this will mark a turning point in the long European debt crisis.
But it's not clear the worst is really over. Randall Kroszner says European governments have huge debts they can't pay off and much of them are held by big institutional investors. Kroszner says today's announcement is, at best, a temporary solution.
KROSZNER: It will help them to have some time to try to address those fundamental issues, but unless they do, this is not going to have any long-run impact.
ZARROLI: Still, central bankers are hoping the move will bring some stability to the financial system - something that has proven more and more elusive the longer the debt crisis drags on. Jim Zarroli, NPR News, New York. Transcript provided by NPR, Copyright NPR.