The Canadian Press

Bank of Canada governor Mark Carney is warning G20 countries to come to terms with the full implications of the Greek crisis and debt overhangs in other countries, or risk a setback to the global economic recovery.

Canada’s top central banker told a Senate committee Thursday that he does not believe the problems emerging in Greece and other southern European countries will lead to a second recession, but they can hamper the recovery.

If markets respond to Greece’s appetite for debt by making borrowing more expensive overall, Carney says there will be an impact on Canada’s growth.

“The situation is serious,” he said, adding that if appropriate steps are not taken “one can expect an increase in longer term interest rates on a global level.”

“Canada’s fiscal position is among the best, (so) we will do better than others, but we will be pulled up by the rise in global interest rates, and that will have a knock-on effect on investment and growth in this country.”

In Gatineau, Que., Prime Minister Stephen Harper also highlighted the Greek situation at a gathering of representatives of G20 business groups, saying that country’s debt crisis serves as an object lesson to other governments.

“The Greek crisis reminds us that government borrowing and government debts cannot go on without limit,” Harper said.

Canada plays host this summer to both the G8 and G20 summits, a gathering of leaders from the world’s biggest economies.

Carney, recently ranked No. 21 on a list of most influential world leaders by Time magazine, told the Senate committee that he has been in contact with European officials and is encouraged.

Carney said he believes the European community and the International Monetary Fund will find a solution to Greece’s fiscal crisis.

European and German officials assured markets Thursday they were working quickly on approving a bailout for Greece as they try to keep the country’s debt crisis from dragging others into a continent-wide financial meltdown.

European Union monetary affairs commissioner Olli Rehn said he was “confident the talks will be concluded in the next days.”

Rehn said negotiators from the EU, the European Central Bank and the Washington-headquartered International Monetary Fund were “working day and night” on a bailout to “safeguard the financial stability in Europe and globally.”

But Carney said the problem is bigger than Greece, and bigger than the requirement that industrialized countries start ramping down their burgeoning debts, which in some cases are equal to the size of their entire economies.

He said the industrialized nations must make clear to China and other emerging economies that the system cannot function unless they adjust their currencies and play a bigger role in supporting global demand.

The United States, Canada and others have long complained that Asian nations have kept their currencies low to boost exports at the expense of other industrial economies, mostly in North America and Europe.

“What’s required is countervailing policies that are in the interests of other countries to expand domestic demand, particularly in emerging markets, to enhance flexibility in exchange rates and obviously keep the global financial system and trading system open,” Carney said.

Carney also stressed the importance to the recovery of the G20 adopting measures to reform the international banking system, which is regarded as a key contributor to the 2008-09 recession.

While Canada’s banks held up well under the stress, Carney said new rules that will require financial institutions to hold more capital reserves to discourage risk-taking will likely also impact Canada’s banks.

“There are some merits to thinking about further strengthening of the capital regime in this country as well,” Carney said.