November 23, 2011 / 8:05 PM / in 6 years

Carney urges immediate Europe debt action

MONTREAL (Reuters) - European leaders need to act “this week, not next year” to fix their debt crisis, Bank of Canada Governor Mark Carney said on Wednesday as fears grew that the crisis is starting to hit the big economies of Germany and France.

In a stiff warning that described the sovereign debt crisis in Europe as “barely contained,” Carney said the euro zone has the resources needed to clean up the mess, but has not provided enough details on how it plans to put those resources to use.

“They have the means, they have the solutions, but they have to act on them, and act on them this week, not next year,” Carney told reporters in Montreal following a speech.

“European authorities need to put in place a mechanism to ensure that all countries in Europe can finance at sustainable rates while they undergo a period of adjustments in those countries - budgetary, structural adjustments.”

Carney, who is also the chairman of the Financial Stability Board, the G20 body overseeing the reform of financial regulations, said it was up to the Europeans to decide how big a role they give to the European Central Bank in alleviating funding problems.

A botched sale of German benchmark bonds on Wednesday sparked fears the debt crisis was beginning to threaten even Europe’s biggest economy.

Stock markets across the world to slid to six-week lows, while the euro fell to its weakest level since October 6.

Countries outside Europe, including Canada, are growing increasingly impatient as the dithering of euro zone politicians undermines confidence in the global economy.


Carney highlighted Europe’s problems as a reason for Canada to maintain what he called “considerable monetary stimulus”.

The bank lifted its key overnight target rate last year to a still-low 1 percent but has held it steady since September 2010, citing European financial woes as major risk.

Analysts surveyed by Reuters earlier this month expect the next move to be a hike, some time in mid to late-2012 or early 2013.

Carney said Canadian economic growth in the second half of this year would be stronger than the bank anticipated in its quarterly projections a month ago.

As recently as July, markets had expected the central bank to raise rates soon. But since then the Canadian economy has been hit by several shocks, Europe’s debt woes, in particular.

Citing that uncertainty, Carney would not comment on how long rates might need to stay at their current level.

“The path for interest rates in Canada will be appropriate in order to achieve the inflation target, and we’re not going to tie our hands on that path because we’re obviously living in volatile times,” he said.

He said annualized growth in the second half of the year would likely be slightly stronger than the 1.4 percent the Bank of Canada forecast last month.

In October, the bank said annualized third quarter growth would be 2.0 percent, dropping to 0.8 percent in the fourth quarter.

Even so, the economy will still not return to full capacity until “well into 2013,” he said, only a slight variation from the bank’s forecast last month that it would return to full capacity at the end of 2013.

He predicted subdued inflationary pressures next year, the result of slower growth and a reversal in the sharp increases in food and energy prices.

Writing by Louise Egan, David Ljunggren and Janet Guttsman, additional reporting by Randall Palmer and Jennifer Kwan; editing by Rob Wilson, Peter Galloway and Jeffrey Hodgson

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