Another financial crisis possible if decisive action not taken, says Flaherty

The minister issued the alarm hours before flying to Washington to meet with his G20 colleagues in an 11th-hour effort to avert a crisis.

If the issue of a Greek default is not dealt with, “I think matters will come to a head, quite frankly,” he told reporters in Ottawa.

“We’ll run into the kind of crisis situation that we ran into in October 2008, so one wants to get ahead of the issue rather than react to another crisis.”

“I’m pleased that we’re meeting today,” he added of the dinner meeting with his G20 colleagues slated for Thursday evening in Washington.

Meanwhile, Prime Minister Stephen Harper and the leaders of Australia, Indonesia, Mexico, Korea and the United Kingdom have sent an open letter to French President Nicolas Sarkozy, the G-20 chairman, calling for strong action at the November Cannes Summit to help ensure global economic stability and growth.

In the letter, leaders said the effects of the international financial crisis are still being felt around the world and that global economic activity has recently weakened, becoming more uneven and uncertain.

They fingered European debt levels as a significant threat to the global economy.

“While Canada’s economic fundamentals remain sound, the risks to the global economy remain serious,” Harper said. “It is crucial for governments to work together in a co-ordinated effort to restore growth and confidence, and to create jobs. Both advanced and emerging economies have important roles to play.”

Three years ago, the failure of New York investment bank Lehman Brothers touched off a wave of panic that froze credit in most advanced countries and sent the world tumbling into a deep recession from which it has yet to fully recover.

Fear that the world’s leaders are incapable or unwilling to save Greece from defaulting on its huge debt, or rescue banks such a default would drag down the sink-hole, swept markets Thursday.

Toronto’s main index tumbled 458 points, or 3.8 per cent, New York fell 328.23 points to 10,796.61. Earlier, Asia plunged, as did Europe.

The loonie fell a whopping 2.41 cents to 97 cents US after closing below parity with the U.S. dollar on Wednesday for the first time since the end of January.

Confidence is so low in the global banking system that the fear of contagion is becoming a self-fulfilling prophesy. On Wednesday, Lloyds of London said it is withdrawing its funds from peripheral European countries over concerns they may fail.

In the U.S., Moody’s rating service downgraded the debt of the country’s three biggest banks _ Bank of America, Citibank and Wells Fargo _ over fears of possible failure.

“I think there is some justified frustration with respect the lack of political decisiveness in Europe,” said Flaherty, adding that “we have been talking about Greece … since January 2010.”

“As you can see the markets are reacting. There is a need for an exercise of political will, of political decision making in Europe.”

Flaherty said Greece and other massively indebted nations must be made to follow through with austerity programs to bring down spending, and Europe must put up the tens of billions of dollars that will be needed to ensure banks don’t fail.

The Canadian dollar is being hit by a flight to the safety of the U.S. greenback in the face of market fears, the minister explained.

He said Canada remains relatively well off, but added that it already is feeling the impact of global uncertainty.