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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.

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“We’re not out of the woods yet,” says Mr. Lamkin, whose fund is investing its cash in insured money market funds – most funds are not insured – and US Treasury securities.

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Another investor, Eric Stein, a portfolio manager at Eaton Vance, says a major concern of American investors is that the European banks have been slow to write off bad loans. Last year, the European banks performed a “stress test” which was viewed with great suspicion by the financial markets. Now the banks are doing another test – results are expected in July – which is supposed to be more transparent.

“They need to make it credible,” says Mr. Stein, who has worked at the New York Federal Reserve Bank.

Is this all much ado about nothing?

Not everyone anticipates a run on European banks.

If losses began to loom, the European Central Bank, the equivalent of the US Federal Reserve, would likely step in and bail out the commercial banks, says Axel Merk, president of the Merk Funds in Palo Alto, Calif.

“I do think they are too big to fail. Everybody would be all bailed out,” says Mr. Merk, whose funds invest in gold and currencies such as the Euro.

In a worst-case scenario, Merk says the money market funds could stop redemptions and pay the principal back – assuming the Central Bank stepped in.

Other money market fund observers agree that the threat is overblown.

“The debate surrounding MMF [money market fund] risk has veered dangerously from the realm of reality into the realm of rhetoric,” testified Mercer Bullard, head of Fund Democracy, Inc. and a law professor at the University of Mississippi School of Law, at a House subcommittee hearing.

Professor Bullard believes concerns over funds’ short-term holdings of European banks “are misleading.” He was particularly incensed over warnings by Eric Rosengren, the president of the Federal Reserve Bank of Boston, who recently stated that money market funds “still remain vulnerable to an unexpected credit shock that could cause investors to doubt the ability to redeem at a stable net asset value.”

Bullard says funds have experienced frequent “unexpected credit shocks” and survived all but one – the 2008 collapse. He maintains there has been no “empirical analysis” of the actual risk posed to the funds by their holdings of European bank debt.

Europeans regulators and political leaders seem determined to solve the problem, even if only temporarily. On Monday, French banks said they were willing to roll over the Greek sovereign debt and give Greece more time to repay their loans.

“It gives a good road map for other financial institutions to follow,” said Mark Zandi, senior economist at Moody’s, at a Monitor breakfast on Tuesday. It will help to “kick the can down the road,” says Dr. Zandi. “I do think the European leadership understands a near-term default would be a very serious problem, and they don’t want to go down that path.”

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