The European debt crisis would pose a threat to U.S. money market mutual funds if a rash of sovereign defaults caused big banks to fail to meet obligations within the next three months.
"It would take a very rapid decline and not just in the smaller European countries" for the debt crisis to threaten U.S. money funds, George "Gus" Sauter, the chief investment officer at Vanguard Group Inc. in Valley Forge, Pa., said in an interview. "You'd probably have to see Spain and Italy get into difficult shape."
Greek lawmakers are scheduled to vote this week on a five-year austerity plan for the cash-strapped nation to secure more international aid and avoid the euro zone's first sovereign default. Money funds could be hurt by a default because they have lent to European banks that, in turn, have lent to Greece and other heavily indebted European countries.
U.S. money funds eligible to buy corporate debt had about $800 billion, or half their assets at May 31, in securities issued by European banks, Fitch Ratings estimated. European lenders held more than $2 trillion at yearend in loans to Greece, Portugal, Ireland, Spain and Italy, the most indebted European countries, the Bank for International Settlements estimated.
"It's not about whether Greece defaults, it's what happens after that, and there's uncertainty behind that," Alex Roever, head of short-term fixed-income strategy at JPMorgan Chase & Co. in New York, said in a telephone interview.
"The risk is if something takes the crisis from Greece to Portugal, Ireland and beyond, and it spreads like wildfire," Deborah Cunningham, head of taxable money market funds at Federated Investors Inc. of Pittsburgh, said in a telephone interview.
"Money market mutual funds still remain vulnerable to an unexpected credit shock that could cause investors to doubt the ability to redeem at a stable net asset value," Eric Rosengren, the president of the Federal Reserve Bank of Boston, said in a June 3 speech. Some funds have "sizable exposures" to European banks through short-term debt, he said.
The $2.68 trillion money fund industry is the biggest collective buyer in the commercial paper market.
The bankruptcy of Lehman Brothers Holdings Inc. led to the Sept. 16, 2008, closure of the $62.5 billion Reserve Primary Fund when it suffered a loss on debt issued by the bank. Reserve Primary triggered a wave of redemption requests when it became the first money market fund in 14 years to expose investors to losses.
Customers were denied access to most of their cash for months as the fund liquidated. Investors, fearing that other funds might fail, withdrew $230 billion from the industry by Sept. 19 in a run that threatened to cripple issuers of short-term debt.
Some analysts played down the danger.
Roever and Peter Rizzo, senior director of fund services at Standard & Poor's in New York, said U.S. managers have been reducing their European bank holdings and shortening the average maturities of those remaining. And Anthony Carfang, a partner at Treasury Strategies Inc. of Chicago, which advises corporate treasurers, said that multiple sovereign defaults could be managed if the banks don't have to write down the bonds' full value.
Meanwhile, rules adopted by the U.S. Securities and Exchange Commission after the Reserve Primary debacle would also protect funds if investors spooked by the European crisis suddenly began withdrawing money, Carfang said. Funds now must keep 30% of holdings in securities that can be converted to cash within seven days.
