BUSINESS

Greece Debt Crisis: Canada May Be Hit With Fallout From Eurozone, Flaherty Says

05/16/2012 03:11 EDT | Updated 07/16/2012 05:12 EDT
AP
OTTAWA - Finance Minister Jim Flaherty is warning the Canadian economy stands to feel the tremors from the political and financial quake in Greece.

The increased alarm over possible after shocks from Europe follows a decision by the European Central Bank to cut off some troubled Greek banks over reports of a flight of deposits from the under-capitalized institutions.

About US$900 billion in deposits have fled Greek banks since the May 7 election, according reports.

Meanwhile, the lack of a functioning government has shaken confidence that the country will follow through on austerity commitments, or that it can even remain in the eurozone.

"These are not good developments, this can create a shock that will affect Canada," Flaherty told a Senate committee Wednesday.

"Our financial institutions have a limited exposure to the Greek banking system, but global banking is interrelated and shocks in the European banking system can have negative effects ... in the American banking system and have some effects on the Canadian banking system as well."

Flaherty said the best thing Canada can do to insulate itself is to maintain its fiscal discipline by reducing deficits, paying down debt and ensuring Canada's banks remain well regulated.

The minister did not speculate about how much of a shock would hit Canada's shores, but most analysts do not believe it would be as great as what occurred after the fall of Lehman Brothers in 2008 that touched off a global recession.

The Bank of Canada has named European debt as the number one risk to the global economy.

In January, the central bank estimated the unresolved debt issues were already costing Canada 0.6 per cent in economic output this year, or about $10 billion. The cost to the global and U.S. economies was pegged even higher, at more than one per cent of gross domestic product and 0.8 per cent respectively.

"Thus far, the impact on global financial conditions from the strains in Europe has consisted mostly of a general retrenchment from risk taking," the Bank of Canada said at the time.

The flow-through to Canada comes from a deterioration of general financial conditions, consumer and business confidence and lower commodity prices from the slowdown in the global economy, it explained.

But Bank of Canada governor Mark Carney has made clear the damage to Canada would be much greater if the situation is not contained.

Flaherty said he believes the richer European countries can still avert a crisis, but need to commit the kind of resources the U.S. did in 2008 to bail out their own troubled financial institutions.

Greece may eventually need to leave the eurozone, although that is not inevitable, he said.

That is up to the Europeans themselves, he said, and whether they are willing to put up the money to sustain the common market and currency regime.

"It seems to me if you are going to have an economic entity like the eurozone, you have to be prepared to stand up for your neighbour in the eurozone," he said.

"Are they going to bail out some of these states that have unsustainable public debt and banks that need recapitalization or not? If they are not, certain consequences will fall."

Despite the escalating crisis, Flaherty said he has not changed his mind about increasing contributions to the International Monetary Fund to act as a backstop to Europe.

And he said emerging countries and the U.S. agree with his position that Europe must ante up first — and much more than already committed — before non-European countries are asked to contribute.

"I think it is a turning point clearly for the eurozone," he said.

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