By Agnes T. Crane The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

Greece’s sovereign debt crisis has been more than a year in the making, giving many U.S. financial firms time to slash even their indirect exposure. But money market funds are still sitting on $360 billion worth of European bank short-term debt. That leaves open a transatlantic channel for euro zone turmoil to rock U.S. markets.

True, the largest money market funds, which American savers see more or less as alternatives to deposit accounts, have cut back lending to banks in peripheral countries like Italy and Spain and mostly shut the door on those in Portugal and Ireland. But they’ve carried on their love affair with bigger European banks.

Moody’s this week put Credit Agricole, BNP Paribas and Societe Generale on notice for a downgrade because of their exposure to a possible Greek default. Yet money market funds still have loans outstanding to French banks of around $200 billion, according to JPMorgan estimates. That’s about 12 percent of the top 10 funds’ assets under management, a proportion that hasn’t changed much over the last year, according to a Fitch survey, despite Greece’s high-profile financial woes.

This indirect exposure creates a potential flashpoint for U.S. money market funds. As the events of 2008 showed, if a fund falls below par value — colloquially known as breaking the buck — investors can be badly rattled. And the temporary federal government backstop put in place during the crisis is no longer in force.

Of course, money market funds probably wouldn’t sit tight if a Greek default looked certain. They might not immediately start dumping European debt, but they’d be apt to lend for much shorter periods of time, even just overnight — a sign of stress that broader financial markets could pick up and amplify.

Meanwhile, negotiations in Europe could bring another rescue for Greece. That would ease the pressure on European banks and U.S. funds. But a Greek default may still be inevitable in the end. It’s odd that money market funds haven’t yet taken advantage of several reprieves to minimize their exposure. It may simply be that the disappearance of Lehman Brothers and other bust U.S. financial firms that relied heavily on short-term lending makes it tough to find alternative investments. But whatever the reason, there’s still at least one financial Trojan Horse lurking in U.S. territory.

By Agnes T. Crane The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

Images of riot police clubbing protesters through a fog of tear gas in Athens rammed home the severity of the Greek crisis to investors globally on Wednesday. With a vacuum of good news in the United States or China, it’s not surprising to see risky assets get hammered. The odd dot-com IPO aside, there’s little to bolster confidence.

The S&P 500 fell 1.7 percent as the euro dove below $1.42 and oil futures knocked $4 off the price of crude. The safe haven of U.S. Treasuries, meanwhile, shaved more than 0.12 percentage point off the yield on 10-year bonds, pushing it back below 3 percent

It wasn’t long ago that investors thought the worst was behind them. The biggest challenge was supposed to be exit strategies. The violence in the Greek capital, perhaps even more than Prime Minister George Papandreou’s offer to step down, reminded investors that concepts like default and austerity don’t always make the world, or markets, more stable.

Investors worry about Greece because a default, if it happens, won’t happen in a vacuum, thanks to its card-carrying euro zone membership. While banks have had ample time to reduce their exposure to all things Greek, default — if it were to happen — is untested in the single currency. In markets, unprecedented events can have unforeseen, and sometimes, very ugly consequences, especially when countries — like banks — are so integrated with their peers. Moody’s Investors Service, in fact, put several French banks on watch for a downgrade, due to their Hellenic exposure.

The sovereign debt crisis, however, isn’t new. But the latest developments come at a time when headlines in the world’s three largest economies have been particularly glum. The United States seems mired in yet another soft patch, China’s red-hot growth engine is sputtering and Japan is trying to emerge from a devastating earthquake and tsunami.

That could mean that sharp moves across global assets, like those that prevailed on Wednesday, are overdone. If the United States were cranking out new jobs, for example, it’s less likely that rioting Greeks would hold so much sway over markets in New York. Put it all together, though, and it’s hard to be too cheery.

By Agnes T. Crane The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

The Federal Reserve got a little taste of what could be a bigger dish of unsavory exit strategies. Auctions of some $30 billion of toxic assets once owned by AIG haven’t gone so well. Only half the latest crop sold, as a fatigued Wall Street fretted about what the glut is doing to mortgage bond prices. The bigger worry, however, is what it says about the fate of the Fed’s whopping balance sheet.

Debt investors have cause for anxiety about the Maiden Lane II portfolio crafted from AIG’s dreck. Two-thirds of it remains to be sold. It’s unfair, though, to put the blame squarely on the Fed. The still-stumbling housing market should be enough to reconsider the value of sub-standard home loans.

The situation still provides a glimpse into the hazards of large asset sales. Even with the best of intentions, they can disrupt financial markets and be harder in practice than theory. The former AIG securities start with a disadvantage. But if the housing market were recovering instead of testing new bottoms, Fed Chairman Ben Bernanke wouldn’t be taking so much heat for what amounts to a tiny fraction of the central bank’s $2.8 trillion balance sheet.

In many ways, that’s the point. Assets are easier to sell when the timing is right. With Maiden Lane II, the Fed can take a break after its next expected sale in July until conditions improve. That’ll be tougher, however, with eventual sales of Treasury and mortgage bonds, which make up the bulk of its holdings, should they meet with similar resistance. These securities have an admittedly deeper investor base and should be easier to trade than subprime debt. But the Fed’s timing could still turn out way off. Bernanke probably won’t sell the huge stockpile of bonds acquired using two rounds of quantitative easing until the recovery is well under way — a time when investors traditionally shun safe havens like Treasuries for riskier fare.

What’s more, there are lingering uncertainties about Uncle Sam’s credit rating and the overseas appetite for U.S. debt, which could prove dangerous wildcards in the Fed’s plans. As calls grow louder for another round of Fed bond buying, policymakers should pause to consider just how palatable the result might be.

By Agnes T. Crane The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

U.S. regulators and financiers could be focused on the wrong mortgage market. They’re right that healthy home lending hinges on the ability of the private sector to finance all or most of it, rather than relying on government-run Fannie Mae and Freddie Mac or their equivalents. But the architects of the post-crisis home loan market may be assuming it needs to be larger than it really does. A post-crisis market could be scarcely half as big as the current $10.5 trillion — and therefore much easier to finance.

Size matters because regulators, the financial industry and community groups are sweating the details of mandated reforms, including setting a new gold standard for mortgages. Tougher criteria — making mortgage lending less risky and home price boom-and-bust cycles less severe — are likely to reduce the supply of loans. If important constituencies are targeting the wrong market size, they risk striking the wrong balance.

Today’s figure for outstanding mortgages is still only 6 percent below the pre-crisis peak, while home prices are down by a third. That’s one hint the market hasn’t bled out the excesses. Once foreclosures, sharply lower home values and the swelling ranks of renters are baked in, the market should be smaller. Currently, the mortgage market is more than twice as big as in less-frothy 2000. If home prices had appreciated in lock-step with consumer price inflation since 1996 and loan-to-value ratios stayed the same, there would now be roughly $5.3 trillion of home loans outstanding, just over half the current level.

Or consider a simple calculation starting from the latest figures. First, assume 4.3 million severely distressed loans are repaid or written off once the relevant homes are foreclosed and resold. That could lop close to $1 trillion off the market. Then suppose the national rate of home ownership drops a couple more percentage points to the 64.5 percent average over the three decades to 1999. That could knock another nearly $300 billion off the market. Then overlay the drop in home prices from the 2006 peak, and a fully deleveraged mortgage market might be around $6.6 trillion in size.

Demographics also argue for smaller homes, and by extension smaller mortgages. Harvard’s Joint Center for Housing Studies expects 3.8 million baby boomers to downsize their homes over the next 10 years. The mortgage market may not quite be cut in half. But policymakers shouldn’t ignore the possibility. A smaller market is a more manageable one — maybe even one that can function without the government backstop most in Washington still want to see in place.

The U.S. government is already up to its neck in housing. Fannie Mae, Freddie Mac and the Federal Housing Administration, all wards of Uncle Sam, now have a combined 290,000 foreclosed homes they need to unload. That doesn’t even count the million-plus that could end up on their books.

The government effectively owns more foreclosed homes than private-sector banks, thrifts and credit unions combined. That’s even after spending trillions of dollars trying to shore up the housing market since the dawn of the financial crisis. Data released earlier this week showed home prices plumbing new post-crunch lows, suggesting the housing hole could still get deeper.

The government’s role as a distressed seller raises more problems than it does, say, for private banks. Policymakers have broad social responsibilities and face political pressures to avoid making things worse for homeowners. Yet sales out of foreclosure tend to weigh on the residential market since they’re priced to sell quickly.

If the market can absorb 125,000 distressed sales a month, as Barclays Capital estimates, the government’s troubled property portfolio doesn’t look like a terrible overhang even after adding another 250,000 homes on the private sector’s books. But the so-called shadow inventory — foreclosed homes available for sale plus those in the foreclosure process and those where the owner is seriously behind on mortgage payments — stands at 4.3 million, equivalent to some 8.5 percent of all single-family homes with mortgages. Federal agencies could end up owning about half that. Other things being equal, it would take nearly three years to burn off the entire inventory.

A lot can happen in that time. But even optimists only expect home prices to hold steady for the next year. That’s hardly anything to cheer about, and any worse result could put more properties in danger of ending up owned by Uncle Sam. According to Freddie Mac, the time from a borrower’s last timely payment to foreclosure has increased to 456 days. For stressed borrowers worried their homes might fall further in value, it could be tempting to stop paying and see what happens.

The government’s expensive efforts so far seem to have prolonged the suffering rather than bringing release. With a double-dipping housing market, the growing overhang of properties it needs to sell can only make the clearout process longer and more painful.

Agnes T. Crane The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

BlackRock’s $2.5 billion stock buyback from Bank of America is the latest sign of its growing might. Boss Larry Fink doesn’t think his firm is too big to fail. And it’s not comparable to a bank. But BlackRock’s $3.65 trillion of assets and increasing influence still make it systemically important.

The ease with which Fink will fund the stake repurchase will be the envy of bank executives. It’s also a testament to how far BlackRock has come. The firm’s assets under management have nearly tripled in less than two years. The once sleepy fixed income shop also now sits atop one of the fastest growing segments in financial markets, exchange-traded funds. BlackRock has a 40 percent share of this booming business.

It has the ear of policymakers worldwide too. BlackRock’s risk management unit has helped the Federal Reserve sell toxic subprime assets and the Irish Central Bank make sense of its crippled financial institutions.

For all that, Fink has been incredibly successful keeping his firm under the radar. Unlike say, PIMCO, whose investment manager Bill Gross moves markets with the swipe of his pen, most investors would be hard-pressed to quote back weekly comments by BlackRock’s chief equity strategist Bob Doll. But with 80 percent more assets under management than the entire hedge fund industry, it couldn’t be more hidden in plain view.

U.S. regulators are beavering away to determine who will wear the scarlet SIFI badge. The designation as a “systemically important financial institution” will bring greater scrutiny and regulation. BlackRock doesn’t think it fits the bill, mainly because it manages others people’s money and doesn’t lever up its own balance sheet like a bank.

But a financial player of this scale has to matter. BlackRock isn’t just more than half as big again as State Street, its nearest rival. The amount of assets it manages is more than Germany, the world’s fifth biggest economy, produces in a year.

By Agnes T. Crane The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

What goes around, comes around. Two years ago, the U.S. government bullied loan investors into accepting the steep losses involved in Chrysler’s bankruptcy plan. Now, they have the upper hand as the automaker seeks fresh borrowing of $6 billion to pay back the Treasury. The creditors are pressing their advantage.

Hot debt markets mean there’s little doubt that Chrysler will be able to raise the money. But the automaker may have to pay more than the 5.25 percent to 5.75 percent loan interest rate that it originally hoped for, and raise more of the total than it wanted from the pricier unsecured debt market.

Though memories are short in finance, it’s almost as if secured loan investors are dispensing some poetic justice. Back in 2009, the U.S. government strong-armed them into writing down more than two-thirds of an investment that they thought had been secured by hard assets. Not only that, but creditors with far weaker claims like the auto workers union and Fiat, which still hasn’t sunk a penny into Chrysler, looked to be getting a better deal.

To be fair, the U.S. auto industry’s weakling has returned to profitability since its turn through bankruptcy. Yet potential buyers of its debt know they have negotiating leverage. Chrysler’s new bosses are anxious to put the government bailout behind them once and for all. The Treasury, meanwhile, would like nothing more than to disentangle itself from the private sector. And Fiat wants a bigger stake in the U.S. group. Before Fiat can increase its share to 46 percent from 30 percent, Chrysler needs to pay back the U.S. and Canadian governments.

That gives the advantage to investors — a relatively rare occurrence in today’s turbo-charged financial markets. Still, if any of them are harboring thoughts of payback, they shouldn’t overdo it. Decent regular interest payments still trump grudges, especially when safe havens like Treasuries return so little. Moreover the unsecured bond market, where Chrysler had already planned to raise $2.5 billion, could probably handle more.

So there’s only limited scope for a well-chilled dish of creditors’ revenge. But even forcing Chrysler to pay a slightly higher interest rate may offer a little satisfaction.

By Agnes T. Crane The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

Call it headline risk. Bad press, along with stressed U.S. state finances, hammered America’s local government debt last year. But the $3 trillion market was never in as bad shape as the doomsayers made out. Still, an improving market — gains in 18 out of the last 19 trading sessions through Monday, according to Janney Capital Markets — isn’t immune to stumbles as dysfunctional states tackle budget woes.

Bank analyst Meredith Whitney last year made a controversial call that “hundreds of billions of dollars” of munis would go bad. That helped tank the market. Nothing yet looks remotely on track for that kind of disaster. There are less than $10 billion of defaulted bonds outstanding — with just $28 million of those coming from the safest instruments like bonds backed by a U.S. state, according to Municipal Market Advisors. Admittedly, though, another $22 billion of bonds are showing signs of stress. That bears watching, especially if the U.S. economy sputters again.

In the meantime, prices have recovered some of their losses and yields on the average AAA-rated 10-year muni bond have dropped about 13 percent to 2.7 percent so far in 2011. Low Treasury rates stemming from the Federal Reserve’s easy monetary policy have helped, but so has a dearth of supply — the $67 billion issued so far this year is less than half the amount sold in the same period last year. That’s something else to keep an eye on, as a surge of issuance could soften the market.

Then there’s demand. Outflows from muni bond mutual funds have slowed. They are running around $1 billion a week, according to mutual fund tracker Lipper. That’s less than half the amount exiting earlier this year, and the aggregate outflow of nearly $50 billion since mid-November is only about a third of the inflow seen between 2008 and late 2010. But a few of those bad headlines and investors could reach for their wheelbarrows again.

Though the market seems stable for now, the state finances of the likes of California and Illinois have an outsized influence on investors’ trigger fingers. The next fiscal year begins on July 1 for 46 of the 50 states, and budget negotiations will gather intensity in the coming weeks. Throw in concern over the federal government’s debt ceiling, and a few jitters — deserved or not — could easily rattle munis.

By Agnes T. Crane The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

Federal Reserve Chairman Ben Bernanke saw green shoots in the U.S. economy more than two years ago. The labor market may at last be growing roots to match. Nonfarm payrolls swelled by a larger-than-expected 244,000 in April, according to data released on Friday. That makes three consecutive months of solid gains.

If the current pace of job creation continues, it will still take two years and five months just to win back the remaining 7 million of the 8.7 million jobs lost after the U.S. recession began in December 2007. But that’s a significant improvement on the 39-month timetable based on the pace of job growth two months ago.

Moreover, the latest jobs figures hold out a glimmer of hope for those hit hardest — workers who haven’t held a job for 27 weeks or more. In April, their ranks thinned by nearly 300,000 and they represented a smaller share of all unemployed workers. If the trend continues, that’s good for them and also reduces the potential social and economic damage from long-term joblessness.

It’s important not to overstate the gains. Many Americans are still struggling amid a sagging housing market and relatively high unemployment, despite the extraordinary stimulus thrown at the U.S. economy. But the data do suggest that recovery is steadily taking hold. The news lifted the gloom that had settled over global financial markets, putting an end to the tailspin on Thursday and early Friday. The price of U.S. oil has stabilized at around $100 a barrel. Silver, meanwhile, was finally able to catch its breath after its free-fall earlier in the week.

The data should also give Bernanke’s Fed something to chew over. The central bank is not expected to raise interest rates until next year. But with its latest massive bond-buying program due to end next month, the U.S. central bank also needs to think about beginning a reversal of that effort by trimming its $2.7 trillion balance sheet. If the labor market keeps improving, that will add to the urgency by making it even harder for the Fed to continue arguing it isn’t throwing fuel on the inflationary fire. Bernanke may need to sharpen his pruning shears in a hurry.