Business

Bank of Canada warns Europe in 'renewed crisis'

Bank of Canada governor Mark Carney warns that eurozone banks are trying to reduce their indebtedness in "a vicious deleveraging process" as the region sinks into recession, a downturn that is beginning to be felt in the rest of the world.
Bank of Canada Governor Mark Carney said on Monday global public debt to global GDP is reaching a ratio of almost 80 per cent, a level that has 'historically been associated with widespread sovereign defaults.' Chris Young/Canadian Press

Bank of Canada governor Mark Carney is warning that eurozone banks are trying to reduce their indebtedness in "a vicious deleveraging process" as the region sinks into recession, a downturn that is beginning to be felt in the rest of the world.

Speaking to the Empire Club of Canada and the Canadian Club of Toronto on Monday, Carney said Europe has entered a renewed crisis, and the world is undergoing a competitive deleveraging, or a paring down of borrowing.

Carney warned that the world’s advanced economies have spent a generation accumulating a "mountain of debt," with global public debt to global GDP reaching a ratio of almost 80 per cent, a level that has "historically been associated with widespread sovereign defaults."

If the process of reducing debt is mishandled, he said, it could lead to disorderly defaults and social unrest.

Carney said that Canada's relatively low public and business debt present a unique opportunity to build a stronger economy for the future.

But he cautioned once again that Canadian households need to end their spending splurge, particularly on homes, now that their debt levels have reached 149 per cent of income, a higher figure than in the U.S. or Britain.

Carney said that since Canadian companies are not burdened by debt, they should take advantage of a unique opportunity to improve productivity and increase their presence in fast-growing emerging markets.

Governments, he said, should continue to bring down deficits, because balancing budgets will be more difficult than it was in the 1990s.

Carney spoke as the debt crisis continued to weigh on the markets, with the TSX finishing the session down 1.1 per cent and the Canadian dollar's official close at 97.48 cents US, down 0.71 cents.

Just last week, the central bank warned in its semi-annual financial stability review that global financial conditions stemming from the debt crisis in Europe were deteriorating rapidly, placing Canada's economy under greater stress and posing a threat to Canadians with large debts. 

With files from The Canadian Press

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