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Central banks move to avoid global liquidity crunch

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Central banks from the world's leading developed economies said on Wednesday they will take coordinated steps to prevent a lack of liquidity in the global financial system, as the euro zone attempts to find a way to stem its debt crisis.

The U.S. Federal Reserve, the European Central Bank and the central banks of Canada, Britain, Japan and Switzerland said in a joint statement they had agreed to lower the cost of existing dollar swap lines by 50 basis points from December 5.

Other measures included setting up bilateral swap arrangements between the central banks so that any bank could tap additional liquidity in their own currencies if necessary. The swap arrangements are good through Feb 1, 2013.

In the United States, the Fed noted that banks were not having difficulty now getting funds in short-term finding markets. But if conditions deteriorate, the U.S. central bank said it has "a range of tools available" to use as a backstop and would deploy them as necessary.

The surprise coordinated move by central banks was aimed at preventing global financial markets from coming under pressure that could potentially lead to a seizing up of credit.

"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 banks said in typically stilted language.

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