Bloomberg News

Europe’s Crisis Creating Global ‘Contagion,’ Flaherty Says

November 27, 2011

(Updates with Flaherty comment on European recession in sixth paragraph, comment from former Bank of Canada governor in seventh paragraph.)

Nov. 25 (Bloomberg) -- Canadian Finance Minister Jim Flaherty says Europe’s debt crisis is creating “contagion” outside the region and policy makers must act while the situation can still be “stabilized.”

“Again today, we are staring a crisis in the face,” Flaherty said at a speech today in Toronto. “The crisis remains far from resolved.”

European leaders have spent two years struggling to prevent contagion from affecting the region’s largest economies such as France and Germany. Italy had to pay almost 7 percent to sell six-month bills at an auction today, and Germany failed to sell 35 percent of 10-year bonds on offer at a Nov. 23 sale.

“Ongoing uncertainty stemming from the European sovereign and banking crisis is leading to broader contagion outside Europe and global credit markets,” Flaherty, 61, said today. “If European authorities move aggressively and with decisiveness to address the crisis and restore financial market stability and confidence, the situation can be stabilized.”

Citizens in many countries face “dire consequences” without a quick solution, including more social unrest and major tax increases, Flaherty said.

Europe’s economy is probably in a recession and the region’s banks need to be recapitalized, Flaherty said at a later press conference. The plans of governments in the region to pare their deficits need to be reviewed and supervised by outside parties, he said.

Staring Into Abyss

Former Bank of Canada Governor David Dodge said at a conference today that governments are more likely to act when they are “staring into the abyss.” The outcome in Europe is “a bit of a crapshoot,” Dodge told the Bennett Jones Business Forum in Lake Louise, Alberta.

Flaherty’s speech didn’t single out any countries or political leaders, adding that all Group of 20 countries have committed to boost economic growth and shrink budget deficits.

He touted Canada’s ratio of debt to gross domestic product of 34.9 percent, which he said compares with the Group of Seven average of 80 percent, citing International Monetary Fund estimates.

While Canada may offer additional stimulus measures if needed, the government won’t resort to “dangerous and risky new spending schemes,” Flaherty said. Canada’s federal and provincial governments must all aim to restore balanced budgets, he said.

Slower global growth led Flaherty to say Nov. 8 he would delay plans to balance the country’s budget by a year. The country’s cumulative deficit would be C$29 billion ($27.6 billion) higher between 2011 and 2016.

Canada’s two-year government bond yield rose 3 basis points to 0.94 percent at 1:59 p.m. in Toronto. Earlier today, the Canadian dollar touched C$1.0524 per U.S. dollar, the weakest since Oct. 5.

--With assistance from Andrew Mayeda in Ottawa and Jeremy van Loon in Calgary. Editors: Paul Badertscher, Carlos Torres

To contact the reporters on this story: Greg Quinn in Ottawa at; Doug Alexander in Toronto at

To contact the editor responsible for this story: David Scanlan at

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