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The impact on our banks if Greece exits euro zone? Not much

Bank towers in Toronto

Kevin Van Paassen/Kevin Van Paassen/The Globe and Mail

Chart 1: Greece's impact on Canadian banks

As it becomes increasingly likely that Greece will exit the euro zone, Canada's big banks are preparing contingency plans to deal with the fallout. How bad would the impact be on our financial institutions, and the economy in general?

Pretty minimal, argues David Madani of Capital Economics, and that's even if the withdrawal entailed a Greek banking collapse or even another sovereign default.

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But if it sparks another global financial crisis, regulators might require one or two Canadian banks to raise more capital, Mr. Madani says in a report.

Canadian banks have negligible direct exposure to Greece, he explains. Their exposure to the euro zone periphery – Greece, Portugal, Ireland, Italy and Spain – is 7.5 per cent of their Tier 1 capital.

The greater impact is through our banks' indirect exposure to institutions in other countries that have exposure to the peripherals. That makes the true exposure about 37 per cent of Tier 1 capital.

Canadian banks would probably be able to absorb a loss on that, says Mr. Madani.

The danger -- a highly remote one -- is that regulators would require some banks to reduce their authorized assets-to-capital multiples and file an action plan.

"Obviously this action plan could prompt less lending to households and businesses."

See the infographic here

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Chart 2: And I'll knock your house down

Ever since the 2007 financial crisis, governments have done their best to provide support for global housing values and prevent a negative "wealth effect" in which falling real estate values would slam a lid on consumer spending.

As concerns mount over the dismal situation in Europe and the precarious U.S. recovery, further stimulus may be needed, says Matthieu Arseneau of National Bank Financial.

The latest data show that home prices remained depressed in most countries that belong to the Organization for Economic Co-operation and Development. In the first quarter of 2012, less than half of OECD countries had rising home prices, according to National Bank.

The situation is no better if you restrict the picture to the G7 nations. Price declines were reported by four of the world's largest economies: the United States, Japan, France and Italy.

"The current economic backdrop in the matured economies of the OECD is therefore characterized by a deleveraging process of governments and financial institutions while household net worth is negatively impacted by falling home prices," Mr. Arseneau says. "These conditions are hardly auspicious for strong economic growth in the medium term."

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See the infographic here

Chart 3: Not competitive? Not to worry

Yes, Canada ranks dismally when it comes to global competitiveness.

Relative to its trading partners, the OECD figures that Canadian manufacturing competitiveness has deteriorated by 61 per cent since 2000, says Eric Lascelles, chief economist at RBC Global Asset Management.

You can bemoan this state of affairs all you want, but it's not really that great a problem and not much can be done about it anyway, he argues in a report.

Three-quarters of the competitiveness gap is due to a strong dollar – which is out of our control – and the remaining quarter appears to be the unavoidable result of being a resource-rich nation during a commodity boom, he says.

Canada's productivity growth in our resource industries is "underwhelming, presumably due to the sheer profitability of the sector and increasingly costly unconventional energy sources," he says.

"Resource wealth may also be dampening the education premium, and encouraging a shift into lower-value manufacturing of the sort that perches immediately atop resource extraction."

Ultimately, this poor competiveness doesn't matter, he concludes.

"The overall economy continues to push ahead with remarkably little damage, In fact, Canada continues to outperform the U.S. by most economic metrics despite swooning competitiveness."

See the infographic here

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About the Author
Quebec Business Correspondent

Bertrand has been covering Quebec business and finance since 2000. Before joining The Globe and Mail in 2000, he was the Toronto-based national business correspondent for Southam News. He has a B.A. from McGill University and a Bachelor of Applied Arts from Ryerson. More

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