The Truth Will Set You Free .....
9/25/11Canadian financial policy-makers ended two days of meetings Saturday expressing some confidence that European authorities have been seized with the urgency of resolving their sovereign debt crisis.
In a briefing with Canadian reporters, Bank of Canada governor Mark Carney said he was "somewhat encouraged" by the stance of European officials at the Washington meetings.
"There's some progress, but I repeat in the end it's about actions. Actions will have to be taken in a timely manner."
The central banker's remarks echoed those of International Monetary Fund managing director Christine Lagarde after the fund's policy-setting committee, of which Canada is a member, issued a new call to action on the European debt crisis and other challenges faced by the global economy.
The plans are there, she said, and the need now is for "implementation, implementation, implementation."
Carney made it clear that Europe's debt woes extend beyond Greece, a reference to debt overhangs that Ireland, Portugal, Spain and Italy also face. And he stressed that if those issues aren't resolved and quickly, the ensuing whirlwind hitting the global economy would be difficult to corral.
Canada — sound fundamentals, notwithstanding — would also feel the punch.
"In the absence of effective resolution (in Europe) one could expect a deterioration of financial conditions globally that would have spillover effects on major economies, including Canada," he said.
"The point is this is an addressable issue, they have the capacity, they have the resources," he said of the eurozone's 11-trillion euro economy.
Carney said earlier European authorities should put up close to one trillion euros into an emergency fund to keep the debt contagion from levelling European banks. That is more than twice the current 440-billion commitment — still unmet — made June 21 by the 17 nations in the grouping.
In part, the two days of meetings at the IMF and World Bank meetings were geared to convincing European leaders they need to move swiftly on approving and expanding the European Financial Stability Facility.
Many hope final ratification will be made before the next G20 leader's summit in November, and that this weekend's assurances will be enough to calm market jitters until that happens.
Already the markets have exhibited lack of confidence in policy-makers by dropping the value of equities about seven per cent in Toronto and New York last week.
Finance Minister Jim Flaherty, along with his U.S. counterpart and others, stressed the need to impress markets with their resolve by urging eurozone leaders to "overwhelm the problem" with a massive bailout fund, as the U.S. did in 2008 in passing the near US$750-billion rescue package known as TARP.
"They need to overwhelm the problem in order to get ahead of the markets," Flaherty said Friday night. "The sooner the better, uncertainty and delay are the enemies."
On Saturday, U.S. Treasury Secretary Timothy Geithner also urged European leaders to work with the European Central Bank to enhance the eurozone's emergency bailout fund, but gave no specific number.
Carney and Flaherty said they did not expect a recession in Canada, but admitted growth is already much slower than predicted earlier in the year, prospects going ahead are dimmer, and the risks are greatly elevated.
If the deterioration happens, Carney stressed Canada has the same tools it used in 2008 to keep the economy from tumbling too precipitously. Then the Bank of Canada dropped interest rates to virtually zero and injected liquidity into the system to ensure banks continued to lend. Ottawa passed a two-year stimulus program that it estimates, with provincial participation, pumped $60 billion into the economy.
"These tools are all there as options," he said. "The ability to keep core elements of the financial markets functioning is there if we were to need it. We're not in the situation at this point in time."
For his part, Flaherty said if the global situation deteriorates, "we'll be pragmatic and we have the flexibility to adapt," suggesting that Stimulus II is on reserve at Finance Canada.
That would scupper Ottawa's four-year deficit elimination plan, but Prime Minister Stephen Harper made clear in the past week that jobs are the government's top priority.
In her closing news conference, Lagarde also expressed some confidence that the Europeans understand what they must do.
"There was clearly common recognition," she said. "There was no denial, no fingerpointing. It was about support."
Asked if the emergency fund needed to be enlarged — although there was no mention of Carney's one trillion euro figure — Lagarde skirted the question, saying it was important as a first step that the 17 European countries already committed to the facility actually implement it.
The IMF committee's plan of action Saturday was a virtual copy in terms of specifics of the surprise G20 communique issued late Thursday night after ministers had met over dinner on the eve of the formal discussions.
It stressed that members have "agreed to act decisively to tackle the dangers confronting the global economy."
The communique continues to recommend that advanced economies adopt policies to bring their fiscal houses in order over the medium term, but leaves open that some further stimulus might been required in Europe and the U.S.
The IMF committee's chairman, Tharman Shanmugaratnam of Singapore, did not utter the word recession, but called the situation "grave." He said the global economy faces the prospect of a short-term shock due to the sovereign debt crisis, followed by longer term stagflation in advanced nations.