Key transatlantic contagion channel still open
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 And the temporary federal government backstop put in place during the crisis is no longer in force.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.