UPDATE 1-Bank of Canada sees risks from Greece, global debt

* Says Greek, broader debt woes could threaten Canada

* Could hamper investment and growth

* Market still sees June rate hike as likely
(Adds details)

By Louise Egan

OTTAWA, April 29 (BestGrowthStock) – The Greek debt crisis and high
borrowing by many Western countries pose an indirect threat to
the Canadian economy and could drag down the pace of growth if
not resolved, Bank of Canada Governor Mark Carney said on
Thursday.

Carney, in testimony to a Senate committee on banking, also
repeated comments made earlier this week that there is no
preordained timeline for the central bank to raise interest
rates as Canada leaves the financial crisis behind.

Most market players expect a June rate hike, but they
priced in a slightly lower likelihood of that following
Carney’s remarks, which once again highlighted risks to
Canada’s economic rebound.

“The debt situation is one of the largest, arguably the
largest, risk to securing the global recovery,” he told the
senators. “The net result of this would be negative for growth
in Canada.”

European Union and International Monetary Fund officials
are in Athens negotiating what could be the largest bailout in
history and hope to wrap up a deal within days in an effort to
prevent the debt crisis from sinking other fragile EU states.

Carney said he was not concerned about the Canadian
government’s investment in debt instruments from Greece, which
were of top quality.

Speaking generally about industrialized countries with
large fiscal deficits, including the United States, Carney said
governments should heed market signals to tighten fiscal
policy.

“If these steps aren’t taken … If they’re not taken one
can expect an increase in longer-term interest rates on the
global level and even though the Canadian fiscal position is
among the best, if not the best, of the G20 … we will do
better than others, but we will be pulled up by the rising
global interest rates and that will have a knock-on effect on
investment and growth in this country,” he said.

Carney, a former Goldman Sachs banker, was named one of the
world’s 100 most influential people by Time magazine on
Thursday for his work on global financial reforms and what it
called his “straight talk” to Canadians taking on too much
personal debt.

Canada, which is chairing the G20 group of developing and
developed nations this year with South Korea, has said it would
use its position to push policymakers to craft credible plans
for taming their deficits.

“Canada can use its chairmanship … of the G20 to
encourage such measures … I know U.S. officials understand
the importance of that issue,” Carney said.

Canada’s fiscal deficit is small, compared with other major
industrialized economies.

LESS STIMULUS NEEDED

Last week, the bank withdrew its commitment to hold its
benchmark interest rate at its current record low of 0.25
percent, conditional on inflation staying on track, until the
end of the second quarter. [ID:nN27125303]

It signaled it would lessen the degree of monetary stimulus
it is providing the economy, but said the extent and timing of
the withdrawal would depend on economic data.

Market players immediately jumped to the conclusion that
the bank would make its first move on rates on June 1 with a 25
basis point hike.

Yields on overnight index swaps, which trade based on
expectations for the Bank of Canada’s key policy rate, edged
slightly lower after Carney spoke on Thursday, showing the
market was seeing rate hikes as a touch less likely.
(BOCWATCH: )

Still, the market is pricing in an 84 percent probability
that that the central bank hikes rates by 25 basis points on
June 1, compared with 85 percent just before Carney spoke and
more than 90 percent earlier this week.

Carney, who also spoke to a parliamentary committee on
Tuesday, repeated a warning about the strong Canadian dollar’s
potential to curb growth in Canada.

“The persistent strength of our currency, combined with our
abysmal productivity, could be a problem for our economy, it
could have an impact on the inflation outlook for Canada and it
could have an impact on the Bank of Canada’s monetary policy.
That should be clear.”

The Canadian dollar extended gains against the greenback on
Thursday and looked set to make another run at parity on
renewed risk sentiment that included a belief that Canada will
be raising interest rates before the United States. [CAD/]

Investing

(Additional reporting by David Ljunggren in Ottawa, Ka Yan Ng
and Claire Sibonney in Toronto; editing by Peter Galloway)

UPDATE 1-Bank of Canada sees risks from Greece, global debt