Hi Nancy,
How would the economic issues in Greece affect the Canadian markets?
Thank you,
Bennett
Dear Bennett,
There is not a short simple answer to your question. I’m sure that books will be written on the subject. I will try and give you the best simplified answer I can.
Basically, Greece has borrowed money in the form of issued bonds. If Greece defaults on the interest payments or any part of the principle value of maturing bonds, the owners of those bonds are not going to receive what they should. The largest holders of Greek debt are France, Switzerland and Germany, but there are many others around the world. If the European Union doesn’t cover the debt, then the value of the bonds will drop significantly. Nobody wants a bond that doesn’t pay the coupon.
Like any bankruptcy, they would receive either nothing or pennies on the dollar. That would ultimately mean losses for the other governments, financial institutions and investors. The loss then means other countries, such as Portugal and Spain, may default on their bonds as well. It could lead to the mentality that, “if they can do it so can I.”
That, in turn, will have a large negative impact on the value of the Euro dollar relative to other currencies. We have already seen the weakening over the past year. That means they need more Euros to buy foreign dollars. With fewer dollars they import less from other countries, including ours. Lower trade sales from Canada lowers our companies’ profits, meaning a possible loss of jobs and slowing down the growth of our economy.
Lower profit translates into little or no share growth of a company’s stock, and negatively impacting our Canadian markets and investors.
Read more articles on this issue at Globe and Mail http://www.theglobeandmail.com/report-on-business/international-news/how-a-greek-default-would-ripple-around-the-world/article2079359/