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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.
Carney, a former Goldman Sachs banker, was named one of the world's 100 most influential people by Time magazine on Thursday for his work on global financial reforms and what it called his "straight talk" to Canadians taking on too much personal debt.
Canada, which is chairing the G20 group of developing and developed nations this year with South Korea, has said it would use its position to push policymakers to craft credible plans for taming their deficits.
"Canada can use its chairmanship ... of the G20 to encourage such measures ... I know U.S. officials understand the importance of that issue," Carney said.
Canada's fiscal deficit is small, compared with other major industrialized economies.
Last week, the bank withdrew its commitment to hold its benchmark interest rate at its current record low of 0.25 percent, conditional on inflation staying on track, until the end of the second quarter.
It signaled it would lessen the degree of monetary stimulus it is providing the economy, but said the extent and timing of the withdrawal would depend on economic data.
Market players immediately jumped to the conclusion that the bank would make its first move on rates on June 1 with a 25 basis point hike.
Yields on overnight index swaps, which trade based on expectations for the Bank of Canada's key policy rate, edged slightly lower after Carney spoke on Thursday, showing the market was seeing rate hikes as a touch less likely.
Still, the market is pricing in an 84 percent probability that that the central bank hikes rates by 25 basis points on June 1, compared with 85 percent just before Carney spoke and more than 90 percent earlier this week.
Carney, who also spoke to a parliamentary committee on Tuesday, repeated a warning about the strong Canadian dollar's potential to curb growth in Canada.
"The persistent strength of our currency, combined with our abysmal productivity, could be a problem for our economy, it could have an impact on the inflation outlook for Canada and it could have an impact on the Bank of Canada's monetary policy. That should be clear."
The Canadian dollar extended gains against the greenback on Thursday and looked set to make another run at parity on renewed risk sentiment that included a belief that Canada will be raising interest rates before the United States.
Additional reporting by David Ljunggren in Ottawa, Ka Yan Ng and Claire Sibonney in Toronto; editing by Peter Galloway