Euro zone debt woes to add urgency to Arctic G7

Bank of Canada Governor Mark Carney (top) takes a ride on a dog sled before the start of the G7 finance ministers' meeting in Iqaluit, Nunavut, February 5, 2010.

IQALUIT, Canada (Reuters) - Europe's deepening debt crisis leapt to the top of the agenda of a meeting of G7 finance leaders in the Canadian Arctic on Friday amid fears that Greece's fiscal sickness was already infecting its peers.

Canadian Finance Minister Jim Flaherty, host of the top-level meeting, said officials from the seven rich industrialized countries had already started talking about Europe's problems, and there was particular concern about the situation in Greece.

"I think we have to be very mindful of the potential failure of domestic economies and of the persistence of some toxic assets in some banks," Flaherty told reporters before the meeting got under way.

Euro zone countries like Greece, Spain and Portugal are under increasing pressure to show that they are bringing public finances under control as financial markets' fears about the situation in one country spread to infect the others.

World stock markets slid to three-month lows on Friday as such worries intensified, while the euro zone's common currency dropped to its lowest since May against the U.S. dollar.

European Central Bank President Jean-Claude Trichet denied speculation in financial markets the ECB might be planning emergency discussions this weekend over the crisis, and German Finance Minister Wolfgang Schaeuble said the euro would remain stable despite the problems in individual countries.

"I don't think they have to concoct a bailout, but they do need to show that they are committed to solving the issues," said Kathleen Stephansen, managing director and chief economist at Aladdin Capital Holdings LLC.

"We need to see a show of unity in backing the steps taken by the various government... Saying nothing about it would be negative."

But the organizers of the meeting insist there will be no communique at the end of their discussions, which start with a working dinner featuring local delicacies like caribou and Arctic char. Before that, some of the ministers ventured out on dog sleds on Frobisher Bay, a frozen inlet of the Arctic Ocean that fringes this remote and inaccessible town.

Iqaluit is home to just 6,000 people, and it's covered with snow at this time of year. It's a three-hour flight from either Ottawa or Montreal and features blocky aluminum-clad buildings set up on stilts to avoid the permafrost.

FINANCIAL REFORM

Another key issue for the G7 ministers and central bank chiefs is the global push for financial sector reforms that was thrown into confusion last month by far-reaching proposals from U.S. President Barack Obama.

He called for limiting the size of banks, restricting proprietary trading and severing their ties to hedge funds and private equity, on top of a previous call for fees on big institutions to recoup the billions spent rescuing the sector.

Britain's finance minister Alistair Darling questioned some aspects of the U.S. proposals, saying risky financial activity would simply shift from banks to other institutions. He said it was important that the world agree quickly in areas where there is common ground.

"The risk is that in 2010, people think 'OK, we're coming through this, maybe we can put this off'. I don't think we've got that luxury," Darling told Canada's BNN television.

Flaherty admitted that the approach from different countries was "not entirely consistent," but that was all the more reason for the ministers to get together to talk.

Even as Europe falters, the delegates will look at how the global economy is recovering. Data on Friday showed the U.S. labor market improving slowly as the unemployment rate dropped to a five-month low although payrolls fell.

Also on the agenda will be the declining role of the G7 itself and its future as a discussion forum compared to the G20 group of industrialized and developing nations, which includes major emerging markets like China and Brazil.

Increasing globalization has raised questions on whether the G7, which cut its teeth on efforts to steer currency markets in the eras of Plaza and Louvre accords in 1985 and 1987, remains the right forum for currency discussions.

"It's more fair to debate the yuan at the G20 instead of G7 meetings," Japanese Finance Minister Naoto Kan told reporters before leaving for Iqaluit.

(Additional reporting by members of the Reuters reporting team in Iqaluit)