TORONTO - Bank of Canada governor Mark Carney says the advanced economies of the world are facing a massive challenge with debt, but Canada may be in a position to take advantage.

In a speech to a business group in Toronto, the central banker warned Monday that a historic era of deleveraging — paying off debt — is being forced upon European countries and the U.S.

The task is so large that Carney compares it to what occurred during the Great Depression of the 1930s, and is by no means assured to go smoothly.

"As a result of deleveraging, the global economy risks entering a prolonged period of deficient demand," Carney said in notes of the speech released in Ottawa.

"If mishandled, it could lead to debt deflation and disorderly defaults, potentially triggering large transfers of wealth and social unrest."

Carney said that Canada's relative virtue throughout this era of deleveraging puts the country in a "privileged position."

"We have much lower total government debt in Canada, our firms' balance sheets are actually in very good shape, our banking system is very strong," he told reporters.

"Our strong position gives us a window of opportunity to make the adjustments needed to continue to prosper in a deleveraging world. But opportunities are only valuable if seized."

Carney said Canadian companies in particular must seize the moment, before it disappears.

Businesses can benefit from one of the world's soundest banking systems in Canada, super-low interest rates and their own sound balance sheets flush with cash. As well, firms in the resource sector can place a safe bet that commodity prices will remain elevated.

That creates an idea situation to invest to boost productivity and make inroads in the fast-growing emerging nations, Carney said.

"This would be good for Canadian companies and good for Canada," he said. "Indeed, it is the only sustainable option available. A virtuous circle of increased investment and increased productivity would increase the debt-carrying capacity of all, through higher wages, greater profits and higher government revenues."

In Europe, the government debt crisis has led countries with huge deficits to cut pensions, thousands of public sector jobs and to raise taxes in an austerity drive to balance the books and secure new bailout financing.

In this economic squeeze, European banks face big losses and have tightened their lending, while companies are scaling back investments — raising fears of a looming recession.

In comments to reporters after the speech, Carney said he believes Europe is already in a recession.

The same trends are not as pronounced yet in the United States, but things are also trending negatively in the world's biggest economy.

The U.S., for instance, faces a situation where the combined debt of individuals, government and non-financial corporations has reached 250 per cent of the country's gross domestic product, or about US$120,000 per individual.

That's about where it was in the midst of the Great Depression nearly 80 years ago.

Carney did not give a corresponding figure for Canada due to variations in the scale of public sector assets, but noted that the fiscal position of Canadian governments is best in the G7 group of big industrial nations, and that of corporations is at a record low.

He noted that while household debt in Canada is higher than that in the U.S. — at about 150 per cent debt-to-income ratio — Canada is still much better off overall than the U.S.

The federal government and provinces such as Ontario and Quebec are likely facing a few years of austerity as they try to balance the books in a slow-growth era.

Governments, Carney said, should resist basking in the glory that they have the strongest finances in the G7 and continue to bring down deficits, because the climate for restoring budgets to balance is harsher than it was in the 1990s.

Then, Canada's labour markets were expanding due to demographic changes, the Canadian dollar was low and the world was entering a cycle of strong growth.

"Today, our demographics have turned, our productivity growth has slowed and the world is undergoing a competitive deleveraging," he noted.

Carney saved the biggest red flag for Canadian households, which have been on an extended spending splurge, particularly on homes.

Excessive borrowing has lifted household debt-to-income levels to a record high. They are now more indebted than households in the U.S. and Britain, he said.

He said households need to reduce their dependence on borrowing for purchases before consumers get in over their heads.

However, he added that his warnings, along with changes to the mortgage lending rules earlier this year, have helped to slow the pace of household debt accumulation.

"Me droning on in public about the dangers of household debt is a way of reminding households that: don't assume that current levels and the current situation will be there forever," he said.

Carney said that as households retrench, a more productive corporate sectors need to step to as a driver of the economy to replace consumers' "debt-fuelled spending."

— With files from Julian Beltrame