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Why Your Money-Market Fund Could Be Hit by Greek Default
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Senior Editor, CNBC.com
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Panagiotis Tzamaros | AFP | Getty Images A protester kicks a riot police officer during a general strike against government austerity plans, in Athens. |
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 as Societe 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.
Correction: An earlier version of this article implied that the US government still explicitly insured money market funds. It does not. Money market fund insurance expired in 2009. Money market deposit accounts with chartered financial institutions are insured by the government.
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| ital | Jun 16, 2011 10:27 AM ET |
if only we had a president that wasnt an a hole. he'd be leading the way so press induced panic wasn't controlling the market. this loser got our votes then unrolled his true agenda,,, and agenda that SUCKS and would have never got his dumb a$$ elected.
| alfredos | Jun 16, 2011 10:36 AM ET |
| DrHeinzDoofenshmirtz | Jun 16, 2011 10:38 AM ET |
LMAO
| FedAssetBubble | Jun 16, 2011 10:41 AM ET |
| tshaunessy | Jun 16, 2011 10:44 AM ET |
This is irresponsible reporting designed to frighten investors by presenting worst case scenario with a low probability outcome.Safeguards have changed radically since the Lehman fiasco. Shameful
| redneckbluedog | Jun 16, 2011 10:50 AM ET |
Raise the US debt ceiling now...!!!!!
| kerouac | Jun 16, 2011 10:56 AM ET |
It seems the French Banks have been whoring yield/risk in pursuit of pass through profit!:)
Let them eat Failure!
...and how about a little MM DIVERSIFICATION from Wall Street "away" in regards to which corrupt institutions you counter-party????
| jcallass | Jun 16, 2011 11:15 AM ET |
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