Does Greece owe you? How the Greece crisis affects US money market funds
American exposure to the Greece crisis is high in certain areas. Half the assets in the 10 biggest money market funds are invested in European banks, which hold a lot of Greece's debt.
Money market funds, usually considered nearly as safe as cash, are suddenly in the spotlight. Why? Millions of Americans hold money market funds, which invest heavily in foreign banks.Skip to next paragraph
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With protests roiling Greece, which teeters on the brink of national bankruptcy, many investors are suddenly wondering how vulnerable they are.
Most of the funds have virtually no direct Greek holdings. On the other hand, many have loaned out significant amounts of money to European banks that do have loans to Greece. Unless the Greek Parliament agrees to make sharp budget cuts, major European nations, including Germany and France, have said they will not make any more loans to Greece, which would drive the country to the edge of default.
So, how safe are investments in money market funds?
In a recent analysis, credit researchers at Fitch Ratings found that 50 percent of the assets of the 10 largest prime money market funds – those that invest in vehicles other than government debt – were invested with European banks though their American subsidiaries. This would mean about $800 billion is loaned out to such banking giants as Deutsche Bank, ING, Barclays and BNP Paribas. Most of those banks are borrowing money in the US, since short term interest rates are so low here.
Fitch found that the money market funds had 6.3 percent of their exposure to German banks, 14.8 percent to French banks and 9.7 percent to United Kingdom banks.
How vulnerable are those European banks? According to the Investment Company Institute (ICI), the actual exposure of European banks to Greek debt is relatively small. The most vulnerable bank has about 1 percent of its assets, and less than 10 percent of its capital, in Greek debt.
“If there was a total loss on Greek debt, the bank would lose 1 percent of its assets,” says Mike McNamee, an ICI spokesman. “That would not tank the money market funds.”
Past efforts to stabilize money market funds
Many investors remember that during the financial crisis in 2008, one money market fund, the Reserve Fund, fell below the sacrosanct net-asset-value of one dollar, because the fund had loaned out hundreds of millions of dollars to Lehman Brothers. To avoid a catastrophe, the Federal Reserve guaranteed the assets of the rest of the money market funds.
Six months later, Mr. McNamee notes, the industry voluntarily changed its own standards. Money market funds must now be able to tap 10 percent of their assets overnight and 30 percent within a week.
But regulators are still concerned. Last week, Chairman Ben Bernanke of the Federal Reserve announced at a press conference that the Fed and other regulators “are continuing to look at ways to strengthen money market mutual funds.”
Last January, McNamee says, the industry spent a lot of money to develop new proposals for the regulators. “So far, the regulators have not settled on any particular proposal,” he says.
Some investors say the problems in Greece, as well as Portugal and Ireland, are worrying them. If the banks and insurance companies who have made loans to those countries have to take losses, it could adversely affect capital levels of the European banks, says Mark Lamkin, chief investment strategist at Lamkin Wealth Management in Louisville, Ky.