Central banks step in to soothe money markets

Fears over a second credit crunch were raised today as five central banks including the Bank of England announced emergency plans to pump billions of dollars into the financial system.

The action echoes the effort by global banks to soothe money markets in the build-up to the financial meltdown of 2008 as fearful banks refused to lend to each other. Eurozone banks have struggled to find dollar funding as distrust between banks has grown.

City sources said worries over Europe's sovereign debt crisis and the health of Europe's banks had spooked US financial institutions, who were hoarding dollars. One said: "In terms of interbank liquidity, the US dollar market has been the problem. US investors including banks are becoming increasingly alarmed and are unwilling to provide liquidity."

The Bank of England is acting in tandem with the European Central Bank, the Swiss National Bank, the Bank of Japan, and the Federal Reserve to pump extra dollars into the system for three months.

The euro jumped against the dollar following the news, building on an earlier rally when France and Germany gave a public vote of confidence to beleaguered Greece.

Analysts said the co-ordinated action showed that central bankers were learning the lessons of the previous crisis.

"This provision of dollar liquidity to European banks confirms our view that policymakers are not asleep and have learned lessons from the post-Lehman credit tightening that caused unwanted bank de-leveraging," said Dan Dorrow, head of FX research at Faros Trading.