Net Net: Promoting innovation and managing change
Net Net: Promoting innovation and managing change

Money Market Funds: The Greek Risk

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As we explained last week, U.S. money market funds aren't directly exposed to Greek government debt. But they hold around $1 trillion of debt issued by European banks—who are among the biggest creditors of Greece.

Mary Pilon and Jon Hilsenrath of the Wall Street Journal have agood story on the latest numbers out of Fitch:

As of the end of May, half of all prime money-fund assets were invested in European banks, according to a report Tuesday by Fitch Ratings. About a third of the 10 largest prime money-market funds are in French, German and U.K. banks, according to Fitch.

What everyone fears here is a repeat of the bad days of 2008.

When Lehman collapsed in 2008, the Reserve Primary Fund suffered losses on Lehman paper, and investors fled. The fund "broke the buck"

as its net asset value fell below the $1 a share that money funds seek to maintain. For several days, the commercial-paper market, the lifeblood of global corporate finance, virtually halted.

In the wake of that blowup, the Fed created special lending programs to backstop money funds, and made dollars available to foreign central banks, which lent the money to banks in their regions.

The SEC has since required funds to release monthly snapshots of their "shadow prices," which reflect the actual market value of their holdings, as opposed to the nominal $1 price at which shares are bought and sold. The SEC also issued rules that require funds to hold more-liquid, higher-quality assets.

Critics said the SEC moves haven't gone far enough, and worry that the European situation could result in a new round of losses for investors.

Already, low interest rates effectively have encouraged fund managers to move into higher-yielding but riskier debt such as that of European banks.

To put it differently, the Fed's zero interest rate policy has sent money market funds hunting for yield. They found it in the short term debt of European banks.


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