A tumultuous Greek exit from the eurozone would have a harder impact on Canada's economy than the credit crisis recession of 2008 and 2009, a report from a major Canadian bank warns.

The prospect of debt-saddled Greece defaulting on its loans, and exiting the euro currency union at some point has moved from a remote possibility to a realistic outcome in recent weeks, as a seemingly endless series of summits has thus far failed to solve the crisis once and for all.

The Toronto-Dominion Bank put out a report this week outlining what the impact of such an event might be on Canada's economy.

"A Greece exit over the next few months is still not the most likely outcome," the bank's economics team wrote. "However, the risk has gone from a very remote possibIlity to one that cannot be ruled out as a real possibility."

"A disorderly exit of Greece from the eurozone represents the No. 1 risk to Canada's economic outlook."

Bank exposure

In broad terms, Canada is relatively insulated from European financial affairs. Only about 10 per cent of our exports go to Europe, and even Canadian banks' claims on European assets are "a relatively slim share of total bank assets," TD said.

Canadian bank holdings from Greece, Ireland, Italy, Spain and Portugal are less than nine per cent of the big Canadian banks' Tier 1 capital ratios, well under the 20 per cent figure in the U.S., the bank notes.

But Canada's real exposure is via world commodity markets, upon which the value of Canada's dollar is largely based and which make up an increasing proportion of Canada's GDP.

Turmoil of the size and scope of a Greek euro exit would significantly affect the American and Chinese economies, which would correspondingly take much of the strength out of high commodity prices.

The systemic European banking crisis that would emerge from a Greek exit would also weigh heavily on Canadian financial markets, TD warns. Canadian government bonds would rally as investors fleeing risk would run for the safety of Canada's finances.

But the Canadian bond rally would pale in comparison to that seen in U.S. treasuries, which are always the investment of choice whenever the global economy hits a major shock.

"As investors pile into U.S.-dollar denomination investments, the loonie would weaken substantially against the U.S. dollar," the bank says.

That could actually be a silver lining, in that a sharp depreciation in the loonie would act as a "shock absorber" to Canada's economy, as Canadian manufacturing would be more competitive even as revenues and output from the resource sector plummets.

Housing market vulnerable

A European financial calamity would be bad news for Canada's housing market, too, the bank warns. The bank says Canadian real estate is between 10 and 15 per cent overvalued as it is, which makes households much more vulnerable to any nasty economic surprises.

"A global financial crisis could be a major catalyst for a sharp housing market correction," the bank said, and with most levels of government in a deficit position because of the stimulus spending they did to get us out of the last recession, they'd have a lot less room to manoeuvre.

"While Canada's economy would probably still fare better than most ... 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," the bank said.