Wednesday, May 23, 2012

Greece could trigger a 'severe recession' in Canada - TD

In case you think our focus on the situation in Europe is somewhat disconnected from the real estate situation in Vancouver... think again.

Toronto Dominion Bank has come out with an economics paper today that outlines what a Greek exit from the Euro could mean for the Canadian economy.

And it isn't pretty.

The hilights from TD:
  • Our most recent Canadian QEF builds in mild recession in Europe and continued financial market volatility due to European sovereign debt concerns. However, in recent weeks, risks of a disorderly Greek exit from the Euro zone have increased. In this report, we highlight what the worst case sce- nario would look like for the Canadian economy.
  • Canada has little direct exposure to Europe and the real economy would be hit more significantly through indirect channels. The event would lead to financial market turmoil and commodity prices would tumble.
  • High household debt and an overvaluation in the existing home market leave the economy more vulnerable to a negative external shock than it has been in the past. 
  • In a worse case scenario, where there is a systemic crisis in Europe, Canada’s economy would endure a severe recession, with the decline being substantially worse than that experienced during the 2008/2009 recession.
TD focuses on a theme all to familiar to those following the housing bubble and concludes by saying:
What separates Canada from other major advanced economies, however, is its high and rising vulnerability to domestic financial excesses that have formed in recent years. While corporate balance sheets remain strong, household debt has become excessive and the housing market is in our view 10-15% overvalued, leaving households more vulnerable to a negative economic event. A global financial crisis could be a major catalyst for a sharp housing market correction and household deleveraging – albeit to a lesser extent than was evident in the U.S. during the past recession. Moreover, Canadian governments would have less room to stimulate compared to the first crisis in 2008-2009... In a worse case scenario, the Canadian economy would likely endure a severe recession, with the decline being substantially worse than that experienced during the recent recession as both exports and domestic spending contract heavily.
Now if you were a Chinese investor who had parked money in some Canadian real estate... do you consider bailing right about now to protect your financial assets?



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  1. great post whisperer.

    Canada should also watch Spain's slide.

    Spain strike


    The majority of Spain’s educational institutions have closed as teachers and students take to the streets to defend their rights. The government has cut billions of euros from educational sector expenses.

    ­The strike is taking place on all levels, from elementary schools to universities in all but three of Spain’s 17 regions. As many as a million teachers and seven million students are expected to take part in Tuesday’s demonstrations.

    If the austerity package goes through, it will reduce government subsidies on education by more than 20 per cent. The measure, unions say, will result in worsening educational conditions, mass teacher layoffs and higher tuition costs.


  2. But let's face it, it's only Greece which is almost insignificant as a country. There may be an initial shock to the system, but cooler heads would prevail in short order and things would return to relative normalcy.

  3. What a ridiculous bunch of bullshit. Greece trigger a recession in Canada? Greece is like the size of Washington state. And we're relatively immune to problems in the United States? Total nonsense all around. If there's a recession in Canada it's due to household leverage. You can't blame one straw for breaking the camel's back.

    1. Yes and No. It also depends on the bond yields and the trust of the markets to highly indebted nations. And this could bring some significant change for the Canadians in terms of change of the mortgage rates. You are right on the housing leverage, but it can be interconnected with Greece (Spain, Portugal, Ireland) problem more than you think.
      Then, the scenario would be less people taking mortgage and rather deciding to rent a place instead of buying it. This would trigger the real Canadian economic crisis.

  4. I believe the issue isn't Greece per se, but the impact a Greek exit from the Euro would trigger in the world of derivatives.

    1. If there are derivatives on Greece with notational value comparable to the economy of Greece, then the problem really isn't Greece. I think the problem everywhere is setting up futures markets that engulf the underlying real market. This is the type of thing people learned not to do during the Great Depression.

  5. ... and then the US bails out everything one last time creating massive inflation worldwide... causing great discontent. Shit happens, and then everyone settles down and start again from nothing.

  6. "Now if you were a Chinese investor who had parked money in some Canadian real estate... do you consider bailing right about now to protect your financial assets?"

    Firstly - I enjoy the blog great job.

    Secondly - I disagree on the last point. I don't believe this is the way the Chinese invest and secondly I think this component of the market has been overstated. I do agree Canada could find Europe's woes as an impetus to a recession here. I don't think the Real Estate market needs any help it has done it to itself. Market correction has begun and a downward slow slide is on the go.