Greek Eurozone Exit Could Shake Canada Too

While many around the world believe a possible Greek economic collapse and the country’s exit from the Eurozone would not affect them, the shock waves could reverberate around world markets and across Canada too. A report from a major Canadian bank warns that a disorderly default by Greece could have a harder impact on Canada’s economy than even the great recession crush of 2008-09.

The Toronto-Dominion Bank wrote that the prospect of Greece going bust is increasing in the wake of constant failures at summits by European Union leaders to do anything except talk about the crisis and say they hope Greece stays in the Eurozone, without offering any advice beyond the country adhering to the austerity measures that have worsened a five-year-long recession, created 21.7 percent unemployment, and led to the closing of more than 1,000 businesses a week.

The bank report said that, “A disorderly exit of Greece from the eurozone represents the No. 1 risk to Canada’s economic outlook.” In broad terms, Canada is relatively insulated from European financial affairs, the site CBC reported. Only about 10 per cent of its exports go to Europe, and even Canadian banks’ claims on European assets are “a relatively slim share of total bank assets,” TD said.

But Canada’s real exposure is via world commodity markets, upon which the value of Canada’s dollar is largely based and which make up an increasing proportion of Canada’s Gross Domestic Product (GDP). The bank said turmoil of the size and scope of a Greek euro exit would significantly affect the American and Chinese economies, which would correspondingly take much of the strength out of high commodity prices. The systemic European banking crisis that would emerge from a Greek exit would also weigh heavily on Canadian financial markets, TD warns. Canadian government bonds would rally as investors fleeing risk would run for the safety of Canada’s finances.

A European financial calamity would be bad news for Canada’s housing market, too, the bank warns. The bank says Canadian real estate is between 10 and 15 percent overvalued as it is, which makes households much more vulnerable to any nasty economic surprises. “A global financial crisis could be a major catalyst for a sharp housing market correction,” the bank said. “While Canada’s economy would probably still fare better than most … in a worst case scenario, the Canadian economy would likely endure a severe recession, with the decline being substantially worse than that experienced during the recent recession,” the bank said.

Greece is lurching towards critical June 17 elections after a stalemated first ballot on May 6, which saw parties opposed to pay cuts, tax hikes and slashed pensions demanded by the Troika of the European Union-International Monetary Fund-European Central Bank (EU-IMF-ECB) in return for $325 billion in two bailouts fail to produce a government. If anti-austerity parties win, there are fears their insistence on renegotiating the terms of the bailouts or reneging on payments could push Greece out of the Eurozone of countries using the euro as a currency, and even topple the economic bloc and upset world markets.
(Sources: CBC)