May 9, 2013 / 4:59 PM / in 5 years

Canada says loosening austerity a mistake, wary of bubbles

LONDON (Reuters) - Big countries’ weakening resolve to cut debt is a mistake, and surplus capital coursing through the world economy risks inflating asset bubbles and causing fresh turmoil, Canada’s finance minister said on Thursday.

Canada's Finance Minister Jim Flaherty gestures as he takes part in a news conference announcing the appointment of Stephen Poloz as the incoming Bank of Canada governor in Ottawa May 2, 2013. REUTERS/Chris Wattie

Jim Flaherty, in Britain to attend a two-day meeting of G7 finance ministers, told Reuters that although it was possible to reduce national debt and foster growth, it was the former which was indispensable.

“I think the resolve has weakened and I think it’s mistaken. We need to press for fiscal consolidation in the medium-term, to have a plan to get our debt/GDP ratios going down rather than up, and at the same time to have some incentives for economic growth,” the veteran finance minister said in an interview.

“I would like to achieve a consensus that we need to do both ... fiscal consolidation and economic growth,” he said of the Friday and Saturday meeting of finance ministers from the United States, Germany, Japan, Britain, Italy, France and Canada.

Flaherty’s assessment chimes with that of Britain and Germany, which is cautious about calls within the euro zone to ease up on debt-cutting.

“(In 2007) there was too much capital sloshing around the world. We all agreed on that as finance ministers. Today we have too much capital sloshing around the world, so one always worries about bubbles,” the 63-year-old said.

“All the more reason for all of us to make sure that we have sound fiscal policies and are moving in the medium-term to reduce our debt/GDP ratios.”

Flaherty said he did not know where asset bubbles might be building, saying that in Canada he had already taken steps to tighten up the housing market.

“We are seeing moderation in the Canadian housing market. We did not have a bubble, but we had the beginnings of the indications of a bubble.”

BANKING REFORM

Flaherty said the summit marked a welcome return to an informal chat without a communique where frank views could be exchanged. He expected to discuss the pace of reforms to banking and finance around the world, with a near meltdown in Cyprus in March focusing minds.

There, Flaherty parted ways with Germany, which may come under renewed pressure to give more support to a banking union in the euro zone as it did at the recent IMF/G20 meeting in Washington.

That idea was proposed last year to help strengthen the single currency area, but Berlin worries it may foot the bill for future bailouts and appears reluctant to agree to a mechanism to wind up failing banks.

“There appeared to be great progress last year when the leaders in Europe said they would go there and told their finance ministers to get there by the end of the year which did not happen,” he said.

“In the broader sphere of the G20 there is concern that this has not happened yet. It’s viewed generally as necessary.”

Canada named an outsider last week to heads its central bank, bringing in the well-respected head of the Canadian export credit agency, who immediately stressed the need to nurture economic recovery.

Stephen Poloz, 57, will take over when Mark Carney leaves to head up the Bank of England, a surprise for markets, which had tipped Carney’s deputy Tiff Macklem to take the top post.

Flaherty did not expect any big policy shifts.

“I‘m comfortable the new governor will pursue a reasonable monetary policy,” he said, adding that the Canadian model where the central bank was not in charge of financial regulation enabled franker chats with banks.

Carney, when he takes the helm at the Bank of England in July will have control of both monetary policy and bank regulation.

Asked how long said he intended to stay in his post, Flaherty said: “Two more years until we have an election in Canada. By that time our budget will be balanced and I’ve said publicly that I intend to stay until the budget is balanced.”

Editing by Hugh Lawson

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