UPDATE 4-Canadian finance minister's job appears unsure, markets fret over distraction

(Adds details about potential replacements, analyst quote about former central bank governor Mark Carney)

By David Ljunggren and Fergal Smith

OTTAWA/TORONTO, Aug 11 (Reuters) – Canadian Finance Minister Bill Morneau’s job appeared uncertain on Tuesday after reports he had clashed with Prime Minister Justin Trudeau, prompting analysts to fret about Ottawa becoming distracted as it tackles the coronavirus crisis.

The Globe and Mail newspaper cited unnamed sources as saying Trudeau was uncertain whether Morneau was the right person to handle the recovery. Morneau was unhappy about how much money Trudeau wanted to spend to deal with the outbreak, it added.

Morneau, 57, has been finance minister since the ruling Liberals took power in late 2015.

“To have turnover in such a key role in the middle of an economic crisis … could rattle investor confidence in Canada and in turn weigh on the Canadian dollar,” said Erik Nelson, a currency strategist at Wells Fargo in New York.

The report was the first public sign of tension inside government over how to handle the pandemic. Canada has provided more than C$212 billion ($159.7 billion) in direct COVID-19 support and nearly 14% of gross domestic product in total support.

Canada’s budget deficit this fiscal year is expected to hit C$343.2 billion, the largest shortfall since World War Two.

Trudeau’s office, asked whether he still had faith in Morneau, said it would respond later. Morneau’s office did not reply to a request for comment.

Potential replacements include Deputy Prime Minister Chrystia Freeland, Foreign Minister Francois-Philippe Champagne and Treasury Board Minister Jean-Yves Duclos.

Another possible choice is Mark Carney, a former head of both the Bank of Canada and Bank of England, the paper said. He does not have a seat in Parliament and tradition dictates he would need to be a legislator before being named to cabinet.

“Carney has a fantastic record of managing policy decisions through crises … whether (he) wants to get involved in politics is more of the question,” said Simon Harvey, a foreign exchange market analyst for Monex Europe and Monex Canada.

Morneau is also under pressure over his failure to promptly repay travel expenses covered for him by a charity at the heart of an ethics investigation. Although Morneau apologized, opposition legislators say he must resign.

“The bus has been rolling toward Mr. Morneau for weeks. Market participants understand that he has become a major political liability,” said Karl Schamotta, chief market strategist at Cambridge Global Payments.

But he added: “Rocking the canoe might increase downside risk for the loonie (the Canadian dollar) and for markets more generally. And a distracted government is the last thing the economy needs,” he said.

Trudeau is also being probed over a possible ethics violation after the charity – which has ties to his family – was chosen to manage a major student grant program. He apologized but denied the charity has received any preferential treatment over the deal, which has been scrapped.

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