G20 ministers face off over Europe debt crisis

Finance ministers and central bank governors from the world's 20 most advanced economies gathered in Paris Friday to develop a comprehensive plan to deal with Europe's debt crisis.

The stakes are high, with many participants and economists arguing that a failure to get this right could plunge the world back into recession.

The discussions among the Group of 20 ministers, which continue Saturday, are expected to be frank, given market perceptions that European leaders have lagged in their efforts to agree on measures to prevent the problems of heavily indebted economies such as Portugal, Ireland, Italy, Greece and Spain from spreading to the larger economies.

The debt crisis has weighed on global stock markets, including the Toronto Stock Exchange, which has fallen 16 per cent from its 2011 high in April.

Jim Flaherty, Canada's finance minister, and Mark Carney, governor of the Bank of Canada, are attending.

Canada has 'huge vested interest'

In an exclusive interview with CBC's Peter Mansbridge, Carney said European leaders need to take action or suffer a "severely impaired" financial system, adding that the crisis will likely have an effect on Canada.

"We're so interconnected in this globalized world," Carney said. "We have a huge vested interest in what happens in Europe."

Flaherty has also been pressuring his European colleagues to move faster on measures to shore up the cash reserves of the biggest European banks.

Those banks hold large numbers of loans made to Greece and other troubled governments, and the value of those assets could drop substantially should Greece default.

The G20 finance ministers want the banks to raise new capital to shore up their cash reserves, but raising capital is expensive these days. It has been estimated that banks may need a minimum of €100 billion ($141 billion).

In September, the International Monetary Fund estimated that the loss in value of those loans may be twice that amount.

So instead of raising reserves, the banks may simply cut back on lending and plunge Europe and the rest of the world back into recession.

Despite the high stakes, leaders have kept expectations low. They have promised a plan by the end of the month, and this weekend is likely to be dominated by behind-doors negotiations.

But recent moves by credit rating agencies have underscored the need for action soon to prevent a loss of confidence from undermining the governments and banks of larger European economies:

• On Thursday, Standard & Poor’s cut Spain’s credit rating for the third time in three years.
• Moody's Investors Service has warned Belgium its ratings might be cut in the next three months, in part because of its exposure to troubled bank Dexia.
• Moody’s has also downgraded a dozen British and nine Portuguese banks.
• And S&P has also cut the ratings of the Italian government and seven Italian banks, while Fitch Ratings has downgraded Italy’s and Spain’s government bonds.

The meeting opened Friday evening with a dinner. Among the topics expected to be addressed are the recapitalization of banks, a way to lower Greece's debt burden and measures to stimulate the world economy.

Providing a backdrop to the discussions will be the European Commission’s plan for dealing with the crisis, which was arrived at on Wednesday, but has still not been fully disclosed in detail.

It would force the banks to raise billions in new capital, provide continued support for Greece, make more effective use of the resources of the eurozone bailout fund, and expand the powers of the commission to control the taxation, spending and borrowing of the 17 nations which use the euro.

The commission, which is the European Union's executive body, hopes the bloc's leaders will embrace its suggestions at a crucial summit on Oct. 23 so that the plan can be presented to the G20 leaders’ summit Nov 3-4.