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An Occupy Frankfurt bonfire near the city's euro sculpture. Italy is the latest euro zone country to face harsh austerity programs. (Michael Probst/AP/Michael Probst/AP)
An Occupy Frankfurt bonfire near the city's euro sculpture. Italy is the latest euro zone country to face harsh austerity programs. (Michael Probst/AP/Michael Probst/AP)

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No game changer as central banks loose 'QE on steroids' Add to ...

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Central banks in co-ordinated move Europe's leaders continue to search for an elusive answer to their mounting troubles, but the world's central bankers stepped in today to buy them some time, sparking a remarkable rally in global markets.

Central banks in Canada, the United States, the euro zone, Britain, Japan and Switzerland moved in today to ease financial pressures created by Europe's debt crisis. Clearly, though, it's a short-term patch, what Avery Shenfeld of CIBC World Markets referred to as "more pomp than circumstance."

As The Globe and Mail's Kevin Carmichael reports from Washington, the central banks are bringing down the rate they charge for emergency access to U.S. dollars.

"The purpose of these actions is to ease strains in financial markets and thereby mitigate the effects of such strains on the supply of credit to households and businesses and so help foster economic activity," the Bank of Canada said in a statement.

The central banks, beginning next week, will reduce the rate they charge to swap U.S. dollars for other currencies by half a percentage point. The new charge will be half a point above the U.S. dollar overnight index swap, or OIS. A swap is essentially a loan backed by collateral. The OIS market is where banks go to borrow dollars or other currencies on a short-term basis.

"Euro zone banks tend to have significant dollar-denominated assets," said John Higgins of Capital Economics.

"Where these assets exceed their dollar-denominated retail deposits, the banks must source the remaining dollars from elsewhere. If U.S. banks are not prepared to lend them dollars outright at an acceptable rate, another option is to borrow them from U.S. banks in exchange for lending euros. But the euro-denominated assets of U.S. banks tend to be much smaller. Accordingly, when concerns about the health of the global banking system are increasing, as they are now, euro zone banks often find their need for dollars outstrips U.S. banks’ need for euros. And when investors’ worries are centred on the euro zone, this is likely to be even more the case."

Today's move had an immediate impact on global markets. While Asian markets slipped, major European markets shot higher. London's FTSE 100, Germany's DAX and the Paris CAC 40 climbed by between 3.2 per cent and 5 per cent.

In North America, the Dow Jones industrial average , the S&P 500 , and Toronto's were all up by 4 per cent or better.

Currencies like the Canadian dollar went along for the ride, as did the euro. Markets were also helped along by an easing in China and better economic news from the United States.

"This version of QE on steroids has sent the bears scurrying back to their caves to lick their wounds, sending European markets to their highest levels in three weeks and near the monthly opening levels," said CMC Markets analyst Michael Hewson in London, referring to the program known as quantitative easing.

But what today's move doesn't do is affect any of the issues at the heart of Europe's troubles. That has been left to the politicians of the 17-member monetary union, who haven't been able to fix the thing after two years of trying. The issues that have plagued the euro zone remain.

Others agreed that the underlying troubles aren't addressed.

"Markets breathed a huge sigh of relief overnight," said senior currency strategist David Watt. "Not due to progress on the EU situation, which remains a key downside risk to growth and market sentiment. Instead, as Europe dithered, monetary policy makers acted, even if their 'actions' have more symbolism than significance."

Mr. Shenfeld said the benefits will be to a "small sample" of banks in the euro zone. Mr. Higgins agreed it will help those financial institutions, but, like others, said it's not a game changer.

How much time does Europe have? Actually, its leaders ran the clock down long ago. From the point of view of Olli Rehn, the economic chief of the EU, “we are now entering the critical period of 10 days to complete and conclude the crisis response of the European Union.”

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