Greek Debt Part 2: Canada May Not Be As Lucky This Time

For the second time in 12 months the Greek debt crisis is threatening to derail the already shaky global economic recovery. The country is close to default again and they want the core European countries, France and Germany, to bail them out, again. Last year Canada emerged unscathed, but this year, Finance Minister Jim Flaherty is saying our nation faces a “real danger” of contagion. If Greece defaults, Flaherty’s biggest concern is Canada’s banking system could be damaged by the ripple affects.

Here is the worst-case scenario for Canada. Greece could fail to get the $170 billion it needs to stave off default. Other European nations, that Canadian banks are closely linked to, would suffer because a member of the EU was bankrupt. Investors would lose confidence and the European markets would experience a meltdown, similar to the one we saw in Fall of 2008. Canadian banks with linkages to European financial institutions would immediately lose money. This would erode profits at Canadian banks and they would be forced to pass that expense on to customers in the form of higher rates and fees.

The constant praise of our sound banking system has given Canadians a false sense of security. Canada is in a much different situation this year. Since 2010 we are already showing signs that our robust recovery after the Great Recession of 2008, is slowing. Our employment picture has improved but Statistics Canada is also reporting that many Canadians have dropped out of the job market and started their own business. This alone shows a bigger dependence on banks in the form of small business loans. If the banks are affected by what’s happening overseas how will they loan money to Canadians trying to get their business off the ground? When it comes to our housing market, Flaherty says Canada is safe from any threat from Greece. But with the banks facing potential damage , it’s implausible that our housing market would not suffer. If banks can’t lend money, people can’t buy homes and the market softens and prices start to come down. It really is that simple.

Recent news that Greece will get the bailout it needs is bringing some short-term reprieve to the markets. This new loan will be added to the $146 billion bailout package it received last year. Academics warn this only delays the inevitable. A Harvard professor commenting on the situation told the Financial Times “the only question is when it will occur,” given the country’s debt-to-GDP ratio is more than 150 percent.

This week, the U.S Federal Reserve announced it was leaving rates unchanged and left the door open to a fresh shot of monetary stimulus should the expected economic rebound fail to happen. Indicating even the U.S. is in the wait and see mode. At a press conference immediately after the announcement, Federal Reserve Chairman Ben Bernanke remarked a default by Greece would have “little impact on U.S. banks”, because they aren’t “significantly exposed” to European nations struggling to meet debt payments. But he did show concern of the same ripple affect stating, “They (U.S Banks) do have very substantial exposure to European banks in the so-called core countries, Germany and France.”

Canada is not an island, and as Flaherty so eloquently put it this week – “no country, any more, is an island — our economies are clearly interrelated.” Canada along with other nations is calling for a “firewall” around Greece to ensure its debt crisis does not spill over to infect the global financial system. Clearly there is great concern. Canada survived the first crisis but now like so many other nations Canadian debt ratios are at record levels and our country is increasingly more vulnerable. Canada got lucky the first time, but our luck may have just run out for this year. If Greece fails we are all in trouble.

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