Canada's finance minister says the U.S. and Europe must fix their banking systems or there will not be an economic recovery.
Finance Minister Jim Flaherty said Canada's "No. 1 priority" is its banks as it should be for the rest of the world's leading economies.
"This is a must-do -- the banks have to be fixed in the United States and in Europe for the economies to start to recover," he said, after a meeting with G7 and G20 finance ministers and central bankers in Washington.
But the finance minister did not come right out and criticize the U.S. for being too slow to fix its banking sector, as the Bank of Canada's governor did on Thursday.
Bank of Canada Governor Mark Carney said he and Flaherty were "keen to encourage" the major economies to take decisive action on correcting the system.
"If they're not fixed in a timely and comprehensive fashion we're going to have an overhang, some tension that will remain in financial markets," Carney told CTV's Canada AM from Washington.
"That will have an impact on Canadian financial conditions and confidence of businesses and households as well and that will slow the recovery."
The Americans have been "stress testing" the banks -- analyzing which are at the greatest risk of failure -- to see what additional capital they'll need.
"It's a major step forward because if they can sort out the capitalization issues with respect to the U.S. banks and the European banks follow then we'll have the banking system in order which is absolutely necessary in order for the real economies to start to improve," Flaherty said.
At Friday's meeting, U.S. Treasury Secretary Timothy Geithner is expected to outline the results from the so-called "stress tests."
The tests were conducted on 19 of the largest financial institutions in the U.S.
Geithner is under heavy pressure to act quickly to help banks get rid of their toxic assets.
"We need to kick start credit," British Finance Minister Alistair Darling told reporters on Friday. "We need to get credit flowing again, and that means you've got to sort out these toxic assets.
"So I hope America, the United States can make progress as fast as it possibly can. That's one of the things that will be discussed at this afternoon's meetings of the G-7 and G-20. It is absolute imperative: If you can't fix the banking system, you won't fix the wider economy."
Craig Alexander, TD Bank Financial Group, said financing and credit is not flowing normally in the U.S. and Europe.
"That decline in the availability of credit has been a contributing factor to the global downturn," Alexander told Â鶹´«Ã½net on Friday.
Earlier this week, Carney announced that the Bank of Canada will keep the key lending rate at the bargain basement price of .25 per cent until next June.
On Friday, he said a faster acceleration of the economy would be the only factor that might change that commitment.
"We will be very transparent and open in terms of our projections, our views of the future of the Canadian economy and the implications for inflation," Carney said.
If more stimulus is needed, Carney said there are two main tools left available to the central bank.
The bank can effectively print money by buying government bonds and assets from banks, in order to free up the institutions to loan more money to clients.
The other tool at the central bank's disposal is the ability to purchase toxic assets from corporations to give them more room to invest in areas such as inventory and new equipment.
Meanwhile, Carney said the government's stimulus measures and the bank's interest rate cuts are starting to take effect in Canada and will continue to build into 2010.
"Both of those factors are going to give a big kick to growth," Carney said.
Flaherty was asked about a report that the government could introduce additional stimulus measures as early as September but said it was "premature" for him to comment.
"I think that is really getting far down the road ahead of what's going on," he said.
The finance minister said the government is focused now on getting the current stimulus measures out into the Canadian economy.
