Canada has reason to worry In the summer, the Bank of Canada calculated the direct claims of Canadian banks on Greek, Irish, Portuguese and Spanish banks, corporations and governments was only 0.
3 per cent of total assets. In the same vein, Merrill Lynch Canada economists put the total potential hit to Canadian banks of estimated European losses at only 0.14 per cent of revenues, and that would be the result of sovereign debt failures not just in Greece, but also in Italy, Spain, Portugal and Ireland. "It's notable but small and that is if all the peripheral European countries defaulted at the rate we think they are going to," said Merrill Lynch's chief economist, Sheryl King. Other Canadian links to Europe are also limited. While about eight per cent of Canadian exports are bound for the continent, the vast majority are imported by Britain, Germany and France, countries not implicated in the crisis. Yet markets do appear to worry. On Tuesday, markets around the world, including the Toronto Stock Exchange, sold off heavily on news Greece's prime minister was putting his country's bailout watch for pandora charm bracelet package to a referendum. On Thursday, they recovered on news he had reconsidered. The fear, said Bank of Montreal pandora jewellry economist Douglas Porter, is that allowing Greece to fail is the equivalent of opening up Pandora's box, letting the evils of the world's financial system fly free. "Basically, we are dealing with something that is unprecedented. We've had defaults before (Russia, Argentina), but not of an industrialized economy and not one in a major currency area." Irrational behaviour can take over, agreed TD Bank chief economist Craig Alexander. This week's padora bracelet referendum shock rippled to Italy, which saw its cost of borrowing rise to above six per cent, nearing levels where interest payments on its 1.6 trillion euro national debt are no longer sustainable. That could mean Italy, too, will soon fall into the kind of economic death spiral Greece now finds itself in. Similar fates could also befall Portugal, Spain and Ireland as financial markets impose strict borrowing checks on those countries. "If the European leadership cannot manage the restructuring of Greek debt in an orderly way, there will be fears others countries could follow the same path and that increases the cost of borrowing for those countries," Alexander explained. "It becomes a self fulfilling prophecy." Or, as Bank of Canada governor Mark Carney put it this week, the result could be a "Lehman moment" a reference to the 2008 collapse of the New York financial giant that touched off the global financial crisis and resulting recession. Although the root causes would be different, Alexander said it is pandora with charms not unreasonable the aftershock would be similar. As in 2008, financial institutions wouldn't know the exposure banks they deal with have to Greek debt.
This could lead to skyrocketing inter bank lending rates, triggering another credit crunch that dries up borrowing for businesses and consumers alike. "At the end of the day, the global financial system is only about trust, and if you lose faith in the system, it seizes up," he explained. The risk of such contagion occurring not Greece should be the prime focus of European leaders, Carney noted this week in testimony before parliamentary committees and interviews.
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