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UPDATE 2-Canada policymakers hot and cold on Greek vote
November 1, 2011 / 5:36 PM / 6 years ago

UPDATE 2-Canada policymakers hot and cold on Greek vote

* BoC’s Carney says respects Greek referendum call

* Finance minister says delay bad for economy, markets

* Carney still sees euro-area crisis contained

* Biggest domestic risk is high household debt

By Louise Egan

OTTAWA, Nov 1 (Reuters) - Canada’s central bank chief said on Tuesday he understands Greece’s call for a referendum on the euro zone’s latest bailout package, a plan that stunned other policymakers and triggered a downward spiral on global markets.

But Finance Minister Jim Flaherty, speaking later in the day, sounded less charitable, calling on his European colleagues to “get on with it” and warning that a delay caused by the vote could worsen market turmoil and endanger the global economy.

Canada’s “good cop, bad cop” routine came a day after Greek Prime Minister George Papandreou blew a potentially fatal hole in plans to overcome the European debt crisis by calling for the referendum. The move guarantees more weeks of political uncertainty just as the rest of the euro zone seemed to have found some much-needed calm.

Carney, however, told lawmakers the tough measures required of Greece over a long period warranted steps to ensure public opinion was on side.

“Obviously in times of difficult structural adjustment, major fiscal austerity, tough decisions that governments such as the Greek government is contemplating, it is imperative that there is widespread support, broad democratic support for those measures because they will unfold over a period of time,” Carney told the House of Commons finance committee.

“And if this is a judgment of the Greek government that this is the best approach to validate that support, we fully respect that,” he said.

Flaherty, on the other hand, said that while it was not up to him to “dictate terms to the Europeans,” he was troubled by the extraordinary delays.

“I encourage all participants to get on with it, to get to the implementation of the agreements that have been reached,” he said. “Delay endangers the global economy.”

The comments came as leaders of the world’s 20 biggest economies prepare to meet in Cannes in the south of France on Thursday and Friday to try to figure out how to prevent Greece’s debt problems from spilling into weightier economies such Italy and Spain‘s.

Carney, expected to be endorsed by the G20 as head of its Financial Stability Board, a global bank regulator, repeated on Tuesday comments that he made last week on the euro-zone debt crisis. Before seeing the actual plan endorsed by European leaders, he had said that he expected the crisis to be contained, although acknowledging the risks involved in that assumption.

He said he sees a mild European recession starting in the fourth quarter and stressed that changes in the region must take place over several years.

He said the euro-zone bank recapitalization plan should include raising new capital rather than just selling assets, warning the latter strategy could displace new credit and intensify pressure on the global economy.

In its quarterly projections last week, the Bank of Canada gave Europe’s debt crisis and U.S. economic weakness as the main reasons for sharply downgrading its domestic economic growth forecasts and extending an interest rate freeze.

The bank has held its benchmark interest rate steady at an ultra-low 1 percent for more than a year.

Most economists expect the bank’s next rate move to be a hike, but not until late 2012 or 2013. Conversely, markets are pricing in a rate cut.

Carney said the biggest economic risk in Canada is high consumer debt, especially if the most vulnerable Canadians take out mortgages at historically low rates.

“In taking on a longer-term debt, people should look at their ability to service it at a more normal rate of interest ... Canadians can make their own judgments about what normal is, but it’s considerably higher than rates are today.”

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