European and American leaders have demonstrated they have the "will to act" but more needs to be done to rein in global debt and deficits, Canada's Finance Minister Jim Flaherty says.

In an interview Monday, Flaherty told Amanda Lang of CBC News that he is most concerned about European sovereign debt, though he noted that the U.S. also needs to tackle its debt and deficit.

"These are fiscal issues; they're not bank issues, they're not monetary issues," Flaherty said. "And it's very important that Italy, Spain and the others — Portugal, Ireland and Greece — go ahead and implement the programs that they've committed to, the fiscal restraint programs, the reforms they've committed to. They have to get it done."

'We know that as these problems fester, they get worse, they don't get better.'—Finance Minister Jim Flaherty

The finance minister's comments came after the European Central Bank's decision to buy billions of euros worth of Spanish and Italian bonds pushed down the two countries' borrowing costs Monday.

Flaherty said the sovereign debt situation wouldn't necessarily lead to a tightening of the credit market "if the countries do what they say they [will] do," but he noted that implementing reform and change can be a difficult undertaking for governments.

"But they must, because their system can't take the weights of their debts and deficits," Flaherty said.

Flaherty said that he still worries about implementation as countries try to move forward. He said there were some "good actions taken today in Europe" but expressed concern about whether there was enough political will to keep driving changes ahead. He also pointed to recent American difficulties, noting the "factionalism" seen in the U.S. Congress during the debt-limit debate.

"We know that as these problems fester, they get worse, they don't get better," he said. "It's important for governments to get ahead of them."

Flaherty said that in a "worst-case scenario," Canadians could see another episode of higher interest rates, tightening credit and slower economic growth.

"These are all things we have seen before when these types of situations have arisen," he said. "Having said that, I think the Europeans realize the severity of the situation and I'm confident in the actions they took today."

Flaherty praised the Canadian financial system, but noted that Canada is part of a broader global economy and is not immune to challenging financial times.

"We're a trading country, and we will get buffeted by what happens elsewhere, in the EU and the U.S.," he said. "But as I said, I'm confident that they are coming to grips with the fundamentals."

Speaking from Brazil, Prime Minister Stephen Harper  said he believed a gradual recovery could continue, despite the fragility of the economy and the "headwinds that are there."

"Our policies have been achieving that in Canada.… But obviously we have to do more."

Harper and Flaherty's comments came as North American markets tumbled as investors worried about the state of global economy and a recent decision by Standard & Poor's to downgrade the long-term credit rating for the U.S. by one notch to AA+ from triple-A.

In Toronto, the S&P/TSX composite index closed with a loss of 491.21 points, or roughly four per cent, at 11,670.96. It has now lost 1,145 points over three trading days.

In New York, the Dow Jones industrial average tumbled below 11,000, falling 634.76 points, or 5.55 per cent, to 10,809.85. The Dow's decline was the steepest since Dec. 1, 2008.

Markets have been sliding in recent weeks as investors fret about U.S. debt, European economic concerns and slowing financial growth.

With files from The Associated Press and The Canadian Press