All eyes on Europe

Canada’s finance minister says global leaders are making some progress in taking the painful measures needed to avert a new economic crisis but are “not there yet.” The decisions rest on European governments, Finance Minister Jim Flaherty made clear Friday after meeting with his G20 counterparts in Washington, where what to do about Greece is front and centre.

WASHINGTON — Canada’s finance minister says global leaders are making some progress in taking the painful measures needed to avert a new economic crisis but are “not there yet.”

The decisions rest on European governments, Finance Minister Jim Flaherty made clear Friday after meeting with his G20 counterparts in Washington, where what to do about Greece is front and centre.

“Certainly in Europe we need an exercise in political will, we need decisiveness, we need clarity,” he said.

Flaherty urged European leaders to step up to the plate and commit to providing the tens of billions of dollars needed to backstop European banks vulnerable to a Greek default.

“There’s the question of whether (the emergency fund) is large enough. Our view is it needs to be larger to have the clear capacity to overwhelm the problem,” Flaherty said.

On Thursday, Prime Minister Stephen Harper made it clear the stakes of dealing with the deepening crisis swirling around Europe’s sovereign debt, headed by the growing possibility of a Greek default.

“We’re now at a stage where the uncertainty in global markets is getting to extremely dangerous levels and simply more steps is not what is going to resolve the problem,” he said.

“I know that the solutions will be extremely difficult but I think we’re at the stage where the solutions and the outcomes that the market and people fear are far worse than what would actually occur if some final decisions were made.”

British finance minister George Osborne said the eurozone must take action before the upcoming G20 leader’s summit in November.

The concern is that if Greece cannot meet its interest payments, it will set off a chain reaction of contagion, first to European banks that hold Greek bonds and then around the world to financial institutions connected to Europe. That would freeze credit and hammer the real-world economy, much as happened in 2008 when Lehman Brothers’ collapse led to a financial and then economic crisis.

“It’s about making sure than banks can actually finance the economy,” said International Monetary Fund manager Christine Lagarde.

Flaherty’s comments suggest leaders are looking beyond Greece itself to the impact it would have on European banks in an effort to prevent the contagion from spreading, as happened with the Lehman Brothers collapse in 2008.

Asked about newspaper reports that Greece is considering asking bondholders to accept a 50 per cent haircut on its debt obligations, Flaherty stressed that contagion was the bigger problem.

“I think it’s pretty clear to everyone that Greece is in a very difficult position in terms of paying off its debts. The key is the knock-on effects on European banks and making sure that contagion is controlled,” he responded.

G20 finance ministers pledged Thursday night that they are “committed to a strong and co-ordinated international response to address the renewed challenges facing the global economy.”

But the rest of the one-page communique offered little new, repeating some of the actions already undertaken or promised, none of which have soothed market fears.

The communique didn’t stop further declines on stock and commodity markets.

The Toronto Stock Exchange shed 123 points in early Friday morning trading — putting Canada’s largest securities market down 20 per cent from the start of 2011 — and commodity prices fell in anticipation of an economic slowdown.

Scotiabank economist Derek Holt said the early optimism over the communique lasted just long enough for the markets to read the rest of the statement.

“If they offer more of the same through traditional fiscal, monetary and regulatory levers that are competing against one another across the world economy, combined with simply throwing a larger blanket over the agonized patients, then I have low hopes for the outcome,” he wrote in a note to clients.

In an address officially opening the meetings Friday, International Monetary Fund manager Christine Lagarde warned the leaders the world faces a similar problem as it confronted in 2008, at the start of worst economic crisis in decades.

“We are at another critical juncture,” she said. “We must choose wisely again. The need is urgent.”