The market rally was centred on the US Federal Reserve’s and other central banks’ announcement that they would provide coordinated action to boost the liquidity of the financial system by reducing US dollar borrowing costs from foreign central banks by between 50 and 100 basis points. The central bank actions are clearly a positive in terms of investor sentiment and will be helpful from a practical basis regarding expanding liquidity. Importantly, the move does underscore the willingness of the Fed and other central banks to support the global banking system.

 

The moves by the central banks, however, do not address the root causes of the European debt crisis. On that point, Germany’s chancellor Angela Merkel and French president Nicolas Sarkozy have been pushing hard for increased European integration and more effective fiscal discipline. Should these efforts succeed, they would provide some reassurance to the policymakers at the European Central Bank that the politicians are serious about establishing the fiscal measures the ECB believes are necessary, which could pave the way for additional ECB intervention in the market. Whether any of this comes about is, of course, still an open question, since any proposed plan would need the backing of countries other than Germany and France, but it does appear that the parties are moving in the right direction.