Central banks act as economy hits 'dangerous new phase'

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Media captionChristine Lagarde: "We have entered into a very dangerous zone of the crisis"

Five central banks have announced a co-ordinated move to try to help the financial system, as the boss of the International Monetary Fund warns of a "dangerous" new economic phase.

The central banks are to provide commercial banks with three additional tranches of loans to help ease funding pressures.

Banking stocks rose sharply, with BNP Paribas up as much as 22%.

IMF managing director Christine Lagarde said "bold action" was needed.

Speaking in Washington, she said: "Uncertainty hovers over sovereigns across the advanced economies, banks in Europe, and households in the United States.

"Without collective, bold, action, there is a real risk that the major economies slip back instead of moving forward."

She added that the debt woes in the eurozone also risked harming economies in the developing world.

"If the advanced economies succumb to recession, the emerging markets will not escape," said Ms Lagarde.

Exposure fears

The move by the Federal Reserve, Bank of England, European Central Bank, Bank of Japan and Swiss National Bank follows fears about the exposure of banks - primarily those in Europe - to eurozone sovereign debt.

This concern has made European banks reluctant to lend to each other, creating the risk of short-term funding problems for those most exposed.

European banks and their American counterparts have been moving funds out of Europe in recent months because of these exposure fears, worsening the liquidity problems in the eurozone banking system.

The new loans are being issued in dollars, because European banks can already access additional euro funds from the European Central Bank.

The three additional three-month loan offers will be conducted in October, November and December.

The main central banks carried out similar action to boost the liquidity of commercial lenders at the height of the financial crisis in 2008. The facility has been withdrawn and reintroduced a number of times since then.

Three-month loans

The UK's FTSE 100 index ended up 2.1% following the central bank announcement, while Germany's Dax added 3.2% and France's Cac advanced 3.3%. Wall Street's Dow Jones ended up 1.7%.

French banks - which had already been higher earlier in the day - posted some of the biggest rises, as they are the most exposed to sovereign debt in Greece and other heavily indebted eurozone nations.

BNP Paribas closed up 13%, Credit Agricole 5.9% and Societe Generale 5.4%.

On Wednesday, Credit Agricole and Societe Generale each had their credit ratings downgraded by rating agency Moody's, after it reviewed their exposure to Greek debt.

Moody's also said it would keep BNP Paribas on review for a possible downgrade.

In the UK, shares in Lloyds Banking Group rose 7.2%, while Germany's Commerzbank added 7.8%.

The euro also gained against the dollar following the announcement by the central banks, adding 0.8% to $1.38519.

Analysts have welcomed the move by central banks, but warned that more will still have to be done to tackle the underlying problem of high levels of eurozone sovereign debt.

"The stress is still there as long as sovereign debt issues aren't dealt with aggressively, but this move eases short-term funding problems," said Peter Boockvar, equity strategist at Miller Tabak in New York.