Worries over Greek crisis wipe out year's stock-market gains in Canada

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Canada's strong recovery from recession is now clouded by Europe's escalating troubles and their potential impact on a still-fragile global financial system.

The worries have spooked the markets and driven most currencies down. The biggest fear: that nervous banks will once again stop lending to each other, triggering a new credit freeze that strangles a nascent economic recovery.

Policy makers in Canada and other major countries have pumped billions of dollars into their economies and financial systems in an unprecedented effort to keep markets working and credit flowing and prevent deep recessions from morphing into a full-fledged global depression. Now it all threatens to come undone.

The Canadian economy created 108,700 jobs last month - more than four times as many as expected and the largest monthly gain on record. Most of the hiring occurred in the private sector, an indicator that stronger corporate profits are now translating into increased spending.

Growing global demand for natural resources and Canada's strong fiscal position has made its recovery sturdier than most. The resurgence is now spreading beyond oil and minerals to such previously battered sectors as forestry and manufacturing.

Rounding out the recovery picture, Washington also reported impressive job numbers Friday - a net gain of 290,000 in April, the biggest monthly jump in more than four years.

But the positive news on the North American front failed to trump fears in the marketplace about the ability of policy makers to resolve the Greek debt crisis, which threatens to inflict severe damage on shaky bank balance sheets in Europe and elsewhere.

While the latest Canadian numbers are welcome, Prime Minister Stephen Harper said it is too soon to celebrate, and the debt situation in Europe will have to be addressed by the G20. "This does indicate that we'll need a special focus [at]the G20 meetings, not just on stimulus but on the exit strategies from stimulus," he told reporters Friday in Croatia.

"In highly indebted countries in particular there are real risks with prolonged high deficits and we all need internationally to have solid exit strategies out of these situations as we approach the recovery," Mr. Harper said.

The Prime Minister, who meets Saturday with German Chancellor Angela Merkel in Berlin, was travelling in Europe during a week in which the economic news seemed to get worse by the day.

"Obviously, the situation in Europe is worrisome to a lot of people," said Mr. Harper, following a bilateral meeting with the Prime Minister of Croatia.

The threat now is that some strapped governments will have difficulty making good on their debt obligations to banks all over the world. Even the growing concern about banks' exposure to these risks could be enough to spur financial institutions to curtail lending to each other. Credit markets could then seize up again, as they did in 2008.

North American companies along with European ones could find it difficult to tap new sources of capital at reasonable rates. And they would likely take cover until the smoke clears.

Stocks on major markets around the world continued their week-long slide Friday. Toronto's benchmark Standard & Poor's /TSX Composite Index fell more than 4 per cent for the week, eliminating its entire gain for the year. The major U.S. indexes have also wiped out their gains for the entire year.

Analysts said the market reaction should come as no surprise.

"You can't dismiss the fireworks," said Robert Barbera, chief economist at New York research and trading firm ITG. "Either they're going to patch something together [that contains the Greek contagion]or it metastasizes and it takes much of southern Europe into negative territory and has big negative effects around the globe."

There is serious concern across the continent that the European Union's unprecedented $140-billion (U.S.) bailout plan for Greece will not be enough to calm markets.

Former IMF chief economist Simon Johnson, writing with a co-author in Friday's International Herald Tribune, warned the plan has only a small chance of preventing an eventual Greek bankruptcy.

"European policy makers are completely unprepared for the broader problems that would follow a Greek restructuring, because markets would immediately mark down the debt for Portugal, Spain, Ireland and even Italy," the article said. "The fear and panic in the face of this would be unparalleled in modern times."

Finance Minister Jim Flaherty said he is concerned about the developments in Europe, and hopes for a strong and early policy response.

"We all share a sense of urgency," said the Finance Minister, who earlier Friday held a conference call with his counterparts in the Group of Seven countries.

He did not go into details of the call, but added that "this has to be resolved" and cannot go on indefinitely. "Everyone understands the need for a clear, timely and strong response," he said.

"Canada is not an island," Mr. Flaherty said of the risks of contagion.

The government has checked on the exposure of Canadian banks to the European situation, and it is "relatively small and contained," he said.

As for the markets, they are likely to remain highly volatile in the months ahead.

"I wouldn't be surprised if the market just churned through the summer," said Edward Yardeni, a veteran Wall Street economist. "We need clarity on how the Greek mess is going to be cleaned up. I'm not sure how the Euro zone's identity crisis will get resolved, but I expect that it won't do much damage to the profit recovery [in North America.]rdquo;

Why is tiny Greece, which accounts for less than 3 per cent of European economic output, causing so much havoc on global markets?

Investors remain mindful of the bitter medicine - and heavy losses - they swallowed during the 2008 financial meltdown. Now that the big equity recovery under way since March, 2009, seems to be running out of steam, they are eager to take their chips off the table before suffering new losses.

"Everyone was burned so badly, and now they extrapolate everything," said Arthur Heinmaa, managing partner with Toron Investment Management in Toronto. "If Greece goes, then Portugal and Spain are next and then the world comes to an end."

With a report from Tara Perkins in Toronto