OTTAWA - The idea that Greece, a relatively small country with a population of barely 11 million, could have a dramatic impact on the economic lives of Canadians can be a difficult concept to grasp.

But economists say that while Canada's direct exposure to Greece and other peripheral European countries facing grave debt issues is minimal, the indirect impact could be significant.

In the summer, the Bank of Canada calculated that the direct claims of Canadian banks on Greek, Irish, Portuguese and Spanish banks, corporations and governments was only 0.3 per cent of total assets.

In the same vein, Merrill Lynch Canada economists put the total potential hit to Canadian banks of estimated European losses at only 0.14 per cent of revenues, and that would be the result of sovereign debt failures not just in Greece, but also in Italy, Spain, Portugal and Ireland.

"It's notable but small and that is if all the peripheral European countries defaulted at the rate we think they are going to," said Merrill Lynch's chief economist, Sheryl King.

Other Canadian links to Europe are also limited. While about eight per cent of Canadian exports are bound for the continent, the vast majority are imported by Britain, Germany and France, countries not implicated in the crisis.

So why worry? Yet markets do appear to worry. On Tuesday, markets around the world, including the Toronto Stock Exchange, sold off heavily on news that Greece's prime minister was putting his country's bailout package to a referendum. On Thursday, they recovered on news that he had reconsidered.

The fear, said Bank of Montreal economist Douglas Porter, is that allowing Greece to fail is the equivalent of opening up Pandora's box, letting the evils of the world's financial system fly free.

"Basically we are dealing with something that is unprecedented. We've had defaults before (Russia, Argentina), but not of an industrialized economy and not one in a major currency area."

Irrational behaviour can take over, agreed TD Bank chief economist Craig Alexander. This week's referendum shock rippled to Italy, which saw its cost of borrowing rise to above six per cent, nearing levels where interest payments on its 1.6-trillion-euro national debt are no longer sustainable.

That could mean Italy, too, will soon fall into the kind of economic death spiral that Greece now finds itself in. Similar fates could also befall Portugal, Spain and Ireland as financial markets impose strict borrowing checks on those countries.

"If the European leadership cannot manage the restructuring of Greek debt in an orderly way, there will be fears others countries could follow the same path and that increases the cost of borrowing for those countries," Alexander explained. "It becomes a self-fulfilling prophecy."

Or, as Bank of Canada governor Mark Carney put it this week, the result could be a "Lehman moment" -- a reference to the 2008 collapse of the New York financial giant that touched off the global financial crisis and resulting recession.

Although the root causes would be different, Alexander said it is not unreasonable that the aftershock would be similar.

As in 2008, financial institutions wouldn't know the exposure banks they deal with have to Greek debt. This could lead to skyrocketing inter-bank lending rates, triggering another credit crunch that dries up borrowing for businesses and consumers alike.

"At the end of the day, the global financial system is only about trust, and if you lose faith in the system, it seizes up," he explained.

The risk of such contagion occurring -- not Greece -- should be the prime focus of European leaders, Carney noted this week in testimony before parliamentary committees and interviews.

"Greece is important ... but in the bigger scheme of things, it's not that important," he said, pointing out its economy represents a mere 1.5 per cent of the eurozone total.

"What's important is that the situation gets contained ... so there is not a Lehman moment coming out of Europe."

Merrill Lynch's King says central banks around the world have learned their lessons from 2008 and would be quick to inject liquidity to keep credit flowing.

In Canada, federal Finance Minister Jim Flaherty offered to take up to $125 billion in mortgage assets off bank books, while the central bank cut rates to near zero and also injected additional liquidity.

That could limit the damage done to credit markets, but it's unlikely to eliminate it. Borrowing costs would likely still rise and conditions for obtaining credit would become more difficult, as happened in the just-past recession.

For businesses, the last recession meant less production. For Canadians, it meant jobs lost, over 400,000 in total.

Canada would be hit in other ways as well, said Porter. A deep drop-off in economic conditions in Europe could depress exports to the area, and also lower the price of commodities that Canada sells to the world, including oil and metals.

A European default would likely result in a new bear market, slicing into household wealth, pensions and spending, not to mention confidence. The 2008-09 recession saw stock values in North America reduced by almost 50 per cent.

King said she believes Canada would still avoid a recession. She puts the likely loss at about 0.5 percentage points of gross domestic product, but other economists say the damage could be far greater.

"We have a sense that contagion should be limited, but it's uncomfortable environment when you use words like should," said Alexander. "Personally, I am not complacent about the risks."