European Union finance ministers on Monday agreed to increase the amount of money they can make available for bailing out member countries struggling under high debts.

The move was an attempt to prevent the financial crisis in Greece from infecting Ireland and Portugal, which have also received international bailouts.

The move came as Canada's finance minister, Jim Flaherty, warned there is still "a real danger"  of contagion from the ongoing debt crises in Europe, including the possibility of some damage to the country's banking system.

"Canada is not an island — no country, any more, is an island — our economies are clearly interrelated," Flaherty said at a breakfast appearance in Toronto following weekend discussions with other G7 countries about the risks associated with Europe's debt crisis and the best way to contain it.

Flaherty's concerns were echoed later in the day by the International Monetary Fund, which warned that Europe's debt crisis could undermine the region's recovery.

"A broadly sound recovery continues," the IMF said in a report, "but the sovereign crisis in the periphery threatens to overwhelm this favourable outlook, and much remains to be done to secure a dynamic and resilient monetary union."

"Failure to undertake decisive action could rapidly spread the tensions to the core of the euro area and result in large global spillovers."


Greek anti-austerity protesters demonstrated in front of the Greek parliament for the fourth consecutive week Sunday. (Louisa Gouliamaki/AFP/Getty Images )

At the same time, Greece was hit by rolling blackouts as employees at the main power utility began 48-hour rotating strikes to protest against the company's privatization, part of austerity plans needed to avoid a national debt default.

It is part of highly unpopular austerity plans, including more tax hikes and spending cuts, that must be passed by the Greek parliament by the end of the month if Greece is to get the next $12 billion installment of its $110 billion bailout next month.

The troubled Socialist government is also struggling to make up for ongoing budget shortfalls, with the finance ministry reporting that its efforts to reduce its deficit remained below the target set by the terms of the bailout from the EU and the International Monetary Fund, with spending exceeding revenues in January to May by $10.26 billion, instead of the expected $9.1 billion.

The European ministers agreed to raise their guarantees for bailout loans from the current rescue fund by 44 per cent, to $1.1 trillion Cdn, according to Klaus Regling, who manages the Luxembourg-based fund.

That will allow the European Financial Stability Facility, as the fund is known, to lend a total of almost $620 billion, an increase of nearly 80 per cent.

The fund requires significant over-guarantees to get a good credit rating and make the bonds it issues attractive to investors.

The move to increase the lending power of the fund was aimed at restoring confidence in the euro zone's struggling economies as the debt crisis in Greece reaches a new boiling point.

Confidence wasn't helped after the ministers delayed their decision on Greece's bailout until mid-July, pending the outcome of Tuesday's confidence vote in the Greek parliament.

But officials said they expected Greece would get the next instalment in July. That would prevent a default that could cause financial chaos in Europe.

The Greek government faces a confidence vote on Tuesday, and prime minister George Papandreou's newly reshuffled government is expected to prevail in the confidence vote.

Flaherty warns of dangers of delay

Flaherty said he hoped European countries can swiftly bring in a second bailout package for Greece.

"Delay is not desirable. It's important to come to a resolution to avoid the danger of contagion arising out of the situation in Greece," he said.

"We know that delay causes more difficulties, makes the situation more expensive and creates more strife at the end of the day."

Despite his remarks about the potential for harm to Canada from a European crisis, he said any direct shock to Canada from a Greek default would be minimal.

Financial markets have been gripped by fears that Greece will default on its debt and infect other economies.

'The European debt crisis has the potential to have as big an impact as the subprime mortgage crisis.' —Sung Won Sohn, California State University

A Greek default would rattle global markets. Some analysts suggest that a panic would cause the Fed to intervene as it did during the 2008 financial crisis, when it lent billions to banks.

"The European debt crisis has the potential to have as big an impact as the subprime mortgage crisis did in the United States," said Sung Won Sohn, an economics professor at California State University.

"If it spreads to Spain and Italy, then the global economy could be facing huge problems."

Italy's debt problems  gained a more dominant profile on Friday, as ratings agency Moody's Investors Service said it was reviewing the country’s credit rating for a possible downgrade.

When the European debt crisis first shook markets last year, the Fed renewed agreements with European central banks to supply dollars to them if they ran short. The central banks would lend the dollars to commercial banks. In return, the Fed would receive European currencies to hold until the dollars were repaid.

With files from The Canadian Press and The Associated Press