SNAP ANALYSIS: Rate cuts alone won't fix financial problems

FRANKFURT (Reuters) - Interest rate cuts alone won't be enough to fix the problems at the core of the global financial system due to a lack of confidence in the health of financial institutions.

Central banks around the world joined forces to cut interest rates on Wednesday, a move aimed at easing financial market strains. Now the question is whether the dramatic move will do the trick.

While the initial market reaction was positive, the action failed to support sentiment for long. By 9:40 a.m. EDT, the FTSEurofirst 300 index of top European shares was down 3.22 percent. In New York the Dow was down 200.63 points, or 2.12 percent, at 9,246.48 after the market open. The S&P 500 was down 2.21 percent and the Nasdaq 2.66 percent.

"At first blush, while this is an big step, it is unlikely to prove sufficient to stem the rot," said Marc Chandler at BBH.

BENEFITS

-- The united front should give investors confidence that authorities are on the ball and are prepared to take extraordinary action as required to shore up the global financial system.

"Concerted central bank rate cuts, considered unthinkable just days ago, show that G7 authorities will do whatever it takes to address the consequences the crisis," Lena Komileva at Tullett Prebon said.

-- The move recognizes the impact of market turbulence on economic growth and the added stimulus should help to shield economies from market fallout.

-- China's participation in the concerted efforts shows that emerging market powers are working with policymakers from industrialized nations to find a truly global solution.

-- The action should free up consumer and business spending by reducing the cost of credit.

POTENTIAL PITFALLS

-- The extraordinary action could fan fears that the economic outlook is even worse than earlier thought. -- The moves will not automatically kick-start bank-to-bank lending, which is vitally important to keep cash circulating around the economy and making sure credit is widely available. -- Inflation, which remains too high in many countries given strong food and energy prices, may rise further with looser monetary policy and erode consumers' spending power.

-- Lower credit costs may entice some investors into the sort of risky behavior which was the cause of the crisis in the first place.

"Will it help? Only time will tell. Will it help the markets? Questionable in the short term," Commerzbank economist Peter Dixon said. "Will it help the economy? No because basically we have got to work through the next weeks, months and years to find out exactly what the implications of recent events are going to have."

(Reporting by Krista Hughes; editing by David Stamp)