Greece’s fiscal crisis poses little direct threat to the Canadian economy, banks and investors, according to a new report from TD Economics.

The greater concern is the risk of financial market contagion is a concern, it cautions.

According to the report, the direct economic consequences stemming from Greek fiscal problems are not that large. “The Greek economy is only 2% of Europe’s economy, meaning that even a sharp economic correction will not necessarily have much impact on the continent-wide growth rate, let alone that of the world,” it says.

“European GDP could even accelerate as a consequence of the financial crisis, as the euro is falling sufficiently quickly that the healthier European nations may enjoy very robust economic growth versus the rest of the world,” it adds.

And, for Canada, it finds that, “The Canadian implications of the Greek fiscal crisis should be relatively tame, and Canada is among the most peripheral of players in the crisis. The direct economic implications should be virtually nonexistent given a trivial amount of trade between Greece and Canada. Similarly, Canadian banks and investors do not appear to hold significant amounts of Greek debt.”

The greater concern is financial contagion, TD warns. “Many foreign banks hold Greek debt, and a default would prompt significant losses across Europe (and to a lesser extend, around the world),” it says, although it adds that this doesn’t represent a systemic risk, as the European banks that are exposed appear to have enough capital to withstand the blow.

Still, while the Canadian banks aren’t among the firms that are directly exposed to this risk, the pain could nevertheless spread throughout the sector in unanticipated ways. “Just as Canada was sucked into the credit crunch despite very little affiliation with the underlying problems, Canada could well be sucked into a European fiscal panic via financial market variables,” TD says.

“For instance, bank credit spreads have begun to march outwards as the market prices in the risk that a Greek default could impact the bottom lines of certain banks. Even for banks without a significant exposure to Greece, the risk that counterparty banks or investors were exposed would increase the cost of borrowing for Canadian banks, and in turn engender some reluctance to lend,” it explains.

Moreover, TD notes that the systemic risk begins to grow when the possibility of default by several countries are combined together. “In a worst case scenario, if Greece, Portugal, Spain, and Italy were to all default on their debt, that would be a significantly more serious proposition. It does not appear to be an especially high probability event at present, but nor is it inconceivable,” it says, noting that the four countries have a combined 2,619 billion euros in debt. “This is a size with potentially systemic consequences. However, the impact should not be as large as the just-ended credit crunch.”