Flaherty tells Europeans to keep their promises

Finance Minister Jim Flaherty says he expects European leaders to stick to the commitments they made at a meeting of G20 finance ministers in Washington, D.C., Friday.

Flaherty pointed Friday evening to the group's Thursday communique, which said there is "flexibility" in the European Financial Stability Facility, the fund set aside to inject cash into banks in the region in the event of a financial crisis. The fund has been set aside to inject cash into banks in the region in the event of a financial crisis, and Flaherty said it must be large enough to overwhelm any financial threat to banks.

He said Friday morning that it was insufficient to deal with the size of the financial crisis, which is "very serious" in Europe.

"It is clear that there is a need for further action to restore confidence and stem contagion," Flaherty said.

"I expect the Europeans to follow through on these commitments. Decisive action is needed and it is important that it be of sufficient scale to return confidence."

Flaherty and Bank of Canada Governor Mark Carney, who was with him at the meeting, said it's urgent to get ahead of the markets.

"This is a fragile situation in Europe, but it's fixable," Carney said.

Carney agreed the problem is manageable if the European countries keep their commitments from Thursday, by making sure financial institutions have enough capital and that the EFSF backstop is big enough.

"It is not a question of ability for the Eurozone. It is a question of political will," he said.

Increase stability fund: Flaherty

The EFSF can be used to buy bonds held by troubled banks, extend credit to debt-burdened countries if their borrowing costs soar and shore up banks which are short of cash.

Flaherty suggested boosting the fund to €1 trillion ($1.4 trillion) from the current €440 billion ($610 billion).

"There's the question of whether [the emergency fund] is large enough. Our view is it needs to be larger to have the clear capacity to overwhelm the problem," Flaherty said.

"Certainly in Europe we need an exercise in political will, we need decisiveness, we need clarity."

Flaherty said Greece faces a "grave challenge" in meeting its obligations, suggesting that the country may need partial forgiveness of its massive debt.

And while a G20 communiqué released Thursday night represents some progress, he said, much more needs to be done.

'We are at another critical juncture.' —Christine Lagarde, IMF managing director

In the communiqué, leaders promised to "take all necessary actions to preserve the stability of the banking systems and financial markets" and ensure banks have enough cash for day-to-day operation.

Flaherty suggested the global leaders are open to a measure floated by Greece that it receive 50 per cent forgiveness of its debt obligations.

"I think it's pretty clear to everyone that Greece is in a very difficult position in terms of paying off its debts. The key is the knock-on effects on European banks and making sure that contagion is controlled," he said.

Later Friday, the head of the International Monetary Fund, Christine Lagarde, repeated her warning that European leaders must act together and soon to meet Europe's debt crisis.

In an address to the G20, Lagarde said the the world faces a similar problem as it confronted in 2008, at the start of the worst economic crisis in decades.

"We are at another critical juncture," she said. "We must choose wisely again. The need is urgent."