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Why Canada Should Cautiously Monitor Greece's Financial Crisis

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Here we are, sitting on our comfortable couches/computer desks, in our comfortable homes, watching TV/surfing the Internet, trying to make sense of the Greek governemt debt crisis from afar and going "Aw, those poor Greeks," probably thinking that it has nothing to do with us, and will not affect our immediate financial futures.

However, a Greek crisis cannot be good for the world, right now, and we cannot/should not be mute spectators. Here are some reasons why we in Canada in particular, and the rest of the world in general, have to cautiously monitor the current events in Greece, and should try to guide or help Greece get out of the crisis before it becomes contagious. Canada already has internal financial stresses, just like many other countries around the world do, at this moment; this Greek crisis can add to external stress for many countries, and this really is bad timing, and an unwanted occurrence for the world economy.

• The world financial markets (global financial system) are intricately connected to each other, probably more so now than ever before in history. The Greek crisis may not by itself be the sole cause, but may become a catalyst, trigger or the last straw that broke the camel's back, in the presence of other current ongoing crises and uncertainties around the world.

• As mentioned in my recent post, Canada is technically two thirds into a recession right now, while an analyst at Bank of America opines that we are already in a recession, since the results of the second quarter of 2015 (April, May and June) will probably show a contracting economy, just like the results of the first quarter did.

• Canada has a real estate and housing market bubble without doubt. What goes up must come down. These up and down waves cannot be controlled. That is how economic cycles work.

China's stock market is in a dive: almost one third down in less than a month, and the Chinese economy is slowing. This will probably reduce our exports to China as well as affect commodity prices due to reduced demand.

• The world has not fully recovered from the effects of the Great Recession of 2008, and the working class is still suffering.

• The oil price crash of late 2014 and early 2015 due to global oversupply hit our revenues and our jobs.

• Forget GDP numbers. As mentioned in my recent post "Is Canada 2/3rds into an Economic Recession this Canada Day 2015?, "Look at the pulse on the ground, in Canada. Talk to the average middle class person on the street -- how is he/she doing financially? Does he/she "feel" financially secure right now? How does this poor consumer confidence help the economy? Talk to your taxi driver. Look at the numerous retail chains that have shut stores, and the trend continues. Look at the number of layoffs that have taken place in the past two to three quarters. Look at corporations in the United States and Canada hoarding cash (a lot of it abroad) and spending with caution even now. Apparently, corporate cash hoard in the U.S. was 2.2 Trillion dollars at the end of 2014. Public spending is cautious and government programs are being cut (some degree of austerity already going on, in the home turf). Look at the number of insolvencies going up. Look at the number of people on EI going up, especially in Alberta. Look at the number of small businesses shutting shops or going into hibernation. Look at the number of new graduates as well as immigrants struggling to find relevant jobs in Canada and in the U.S.".

Russian financial crisis 2014-15 will affect Canadian exports, as Russia bans food imports from Canada. Not only did the size of the market go down because of an expected recession in Russia, but we face a ban for standing up against Russia so strongly and openly, while supporting economic sanctions against it.

Canada has no gold reserves -- the only G-7 country to be in this situation, but it would have been better to have gold reserves.

Canada ranks number 11 in the world by nominal GDP, but we are not at number 11 or better/lesser among the countries of the world in foreign exchange reserves (as every Canadian would probably want and hope), we rank only as 28th w.r.t. forex reserves among countries of the world.

Canada's national debt is more than 1.2 trillion dollars, and is growing steadily, while the annual interest payments are high.

• Canada's national debt as a percentage of GDP is high, at around 87 per cent and ranks as the 13th highest among the 30 most advanced economies. This means that while Canada produces a lot of wealth, we are spending a lot as well, and are not saving as much as we probably should.

Consumer debt in Canada (including mortgages) was $1.529 trillion by the end of 2014.

• The recent average consumer debt of Canadians (excluding mortgages) was $20,967.

Let us compare two scenarios below to explore how the current situation in Greece is similar to another scenario seven years back.

Year 2008:

A bunch of financial institutions in the U.S. were in trouble, and Lehman Brothers was not bailed out. It was supposed to have too many toxic components in the portfolio, with liabilities greater than assets. Bankruptcy was considered to be the only reasonable option. On its deathbed, it was probably considered not big enough to make an impact on the U.S. economy with its failure (opposite of too big to fail). Lehman Brothers went down, but it did take Wall Street down with it for a while. America sneezed, and the rest of the world financial markets caught a cold.

You and I felt the effects for quite a few years down the road.

Year 2015:

A bunch of European countries in recent years faced financial problems (Spain, Ireland, Greece, Portugal), some more than others and received bailouts. Greece, in spite of two bailouts, is deeply in debt. Right now, it is considered not big enough to make an impact with its failure, being only a small percentage of Europe's economy (opposite of too big to fail). Without a bailout, Greece will go down financially.

Will a Greek sneeze cause eurozone to catch a cold? If so, if/when the eurozone sneezes, will the rest of the world catch a cold?

Different people will give you different answers. However, remember, no expert (who speaks explicitly) is always right. It is hilarious now to go on YouTube and see how wrong the financial pundits were, pre-2008 crisis. The ones who are right (the smart money) do not talk about it in the open. Instead, they quietly place their bets in the markets and profit when their prophecies come true. Later, they brag about their windfalls in money magazines.

Speaking of YouTube, here is an interesting SNL clip about Greek Gods addressing a financial crisis that may give you a chuckle.

I have visited Greece a dozen times on work, and have loved every visit -- friendly people, nice food, large tourist cruise ships, and so much history. I remember the locals telling me how everything (food, taxi fare, you name it) was cheaper before Greece entered the eurozone. Seems like the country has gotten into quite a pickle with its massive debt, without a credible plan/proposal to get out of debt, and without an immediate solution in sight.

What will happen next, after the "No" vote in the Greek bailout referendum on 5th July 2015? Currently, Europe needs stability in Greece as much as Greece wants stability for itself. Will there be a compromise, and will the crisis be contained? It better be. If not, how will it impact Europe? How will it affect the rest of the world, and us in Canada? The collapse of Lehman brothers was the final straw in 2008 that triggered much larger events. Hope the Greek crisis does not become the final straw in 2015, leading to a larger domino/ripple/snowball effect.

Europe, it is not just your problem anymore!

This post is a modified and expanded version of my recent post on LinkedIn Pulse: "Greece : Eurozone : World = Lehman Brothers : Wall Street : World ?"

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