By Julian Beltrame, The Canadian Press
OTTAWA - Bank of Canada governor Mark Carney is warning G20 countries to come to terms with the full implications of the Greek crisis and debt overhangs in other countries, or risk a setback to the global economic recovery.
Canada's top banker told a Senate committee Thursday that he does not believe the problems emerging in Greece and other southern European countries will lead to a second recession, but they could hamper the recovery.
If markets respond to Greece's appetite for debt by making borrowing more expensive overall, Carney says there will be an impact on Canada's growth.
"The situation is serious," he said, adding that if appropriate steps are not taken "one can expect an increase in longer-term interest rates on a global level."
"Canada's fiscal position is among the best, (so) we will do better than others, but we will be pulled up by the rise in global interest rates, and that will have a knock-on effect on investment and growth in this country."
In Gatineau, Que., Prime Minister Stephen Harper also highlighted the Greek situation at a gathering of representatives of G20 business groups, saying the debt crisis in Athens serves as an object lesson to other governments.
"The Greek crisis reminds us that government borrowing and government debts cannot go on without limit," Harper said.
Canada plays host this summer to both the G8 and G20 summits, a gathering of leaders from the world's biggest economies.
Carney, recently ranked No. 21 on a list of most influential world leaders by Time magazine, told the Senate committee that he has been in contact with European officials and is encouraged that there will be a solution to the Greek crisis.
European and German officials assured markets Thursday they were working quickly on approving a bailout for Greece as they try to keep the country's debt crisis from dragging others into a continent-wide financial meltdown.
But Carney said the problem extends beyond Greece, a view echoed in a TD Bank report released later in the day that names France, Germany and the United Kingdom, along with the so-called PIIGS countries (Portugal, Ireland, Italy, Greece and Spain).
All are approaching or have already surpassed debt burdens of more than 100 per cent of gross domestic product. Canada's debt burden, by comparison, is expected to peak at around 35 per cent.
"There is no guarantee that this will be sufficient to reassure investors regarding the outlook for the other debt-beleaguered euro members," TD's economists said of the Greek rescue efforts.
Even if Europe passes that immediate test, severe austerity measures — such as higher taxes and reduced spending on pensions and health care — will be necessary to stop the budgets of other countries from imploding, they argue.
"That's the risk," adds BMO deputy chief economist, Douglas Porter. "You will have a lot of governments forced to take some pretty severe medicine and it takes a lot of the wind out of the world economy's sails."
Carney says the industrialized countries can't do it alone and calls the upcoming June G20 meeting in Toronto critical because of the need to bring emerging economies, such as China, on side.
He said the industrialized countries must make clear to China and other emerging economies that the system cannot function unless they adjust their currencies and play a bigger role in supporting global demand.
The United States, Canada and others have long complained that Asian states have kept their currencies low to boost exports at the expense of other industrial economies, mostly in North America and Europe.
"What's required is countervailing policies that are in the interests of other countries to expand domestic demand, particularly in emerging markets, to enhance flexibility in exchange rates and obviously keep the global financial system and trading system open," Carney said.
Carney also stressed the importance to the recovery of the G20 adopting measures to reform the international banking system, which is regarded as a key contributor to the 2008-09 recession.
While Canada's banks held up well under the stress, Carney said new rules that will require financial institutions to hold more capital reserves to discourage risk-taking will likely also impact Canada's banks.
"There are some merits to thinking about further strengthening of the capital regime in this country as well," Carney said.
