Even your money-market fund could be hit by Greek default

Nearly half of US mutual fund assets are invested in European banks, some of which face big losses in case of a Greek default. Banks could see their ratings downgraded after a Greek default.

Lefteris Pitarakis/AP
Greek riot police officers throw tear gas as they chase protesters during clashes in Athens' main Syntagma square, June 15, 2011. The banner reads in Greek: 'Continuous strikes, until victory'. Hundreds of protesters clashed with riot police in central Athens Wednesday as a major anti-austerity rally degenerated into violence outside Parliament, where the struggling government was to seek support for new cutbacks to avoid a disastrous default. A Greek default could have ripple effects for investors in the United States and beyond.

Some of the safest, plain-vanilla investment accounts in the U.S. could be challenged if Greece defaults on its sovereign debt.

Forty-four percent of mutual fund assets in the U.S. are invested in the short-term debt of European banks, according to a report from Fitch.

A separate report from Moody's noted that 55 percent of those holdings are in the commercial paper of French banks, such asSociete Generale, BNP Paribas [BNP-FR 51.11 -0.19 (-0.37%) ] and Credit Agricole. French banks are some of biggest creditors to Greece, with over $53 billion in outstanding loans to the Greek government and private sector.

While fund managers have had plenty of warning of the potential of a default in Greece, many would likely still be caught off guard. Many fund managers assume that a bailout will prevent a default by Greece.

The bankruptcy of Lehman Brothers similarly caught money-market fund managers off guard, famously causing the Reserve Fund to "break the buck."

The debt of these French banks is still very highly rated and Moody's says the risk of default on the short-term debt is very low. But the high ratings assume that the probability of a default by Greece is very low.

If Greece defaults, it is possible that the market value of the commercial paper of French banks could plummet and the ratings could be downgraded. Money-market funds would likely refuse to fund new issuances of the short term debt, creating a liquidity problem for the French banks.

Other European banks would likely face pressure as investors tried to measure their exposure to Greece and those over-exposed to Greece.

One thing that may help money-market funds weather the Greece storm better than the Lehman hurricane is that they now have an implicit US government backing. While no longer directly insured by the FDIC, many believe that in a crisis the government would once again step in to insure the accounts, just as it did in 2008.

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