Bank of Canada sees risks from Greece, global debt

Thu Apr 29, 2010 2:56pm EDT
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By Louise Egan

OTTAWA (Reuters) - The Greek debt crisis and high borrowing by many Western countries pose an indirect threat to the Canadian economy and could drag down the pace of growth if not resolved, Bank of Canada Governor Mark Carney said on Thursday.

Carney, in testimony to a Senate committee on banking, also repeated comments made earlier this week that there is no preordained timeline for the central bank to raise interest rates as Canada leaves the financial crisis behind.

Most market players expect a June rate hike, but they priced in a slightly lower likelihood of that following Carney's remarks, which once again highlighted risks to Canada's economic rebound.

"The debt situation is one of the largest, arguably the largest, risk to securing the global recovery," he told the senators. "The net result of this would be negative for growth in Canada."

European Union and International Monetary Fund officials are in Athens negotiating what could be the largest bailout in history and hope to wrap up a deal within days in an effort to prevent the debt crisis from sinking other fragile EU states.

Carney said he was not concerned about the Canadian government's investment in debt instruments from Greece, which were of top quality.

Speaking generally about industrialized countries with large fiscal deficits, including the United States, Carney said governments should heed market signals to tighten fiscal policy.

"If these steps aren't taken ... If they're not taken one can expect an increase in longer-term interest rates on the global level and even though the Canadian fiscal position is among the best, if not the best, of the G20 ... we will do better than others, but we will be pulled up by the rising global interest rates and that will have a knock-on effect on investment and growth in this country," he said.   Continued...

<p>Bank of Canada Governor Mark Carney prepares to speak at a House of Commons committee meeting on Parliament Hill in Ottawa April 27, 2010. REUTERS/Blair Gable</p>