Eurozone Sparks More Jitters for Money Market Investors

Monday, 25 Jul 2011 08:04 AM

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A few weeks ago, investing weekly Barron’s shook up the normally sleepy world of money market mutual funds by suggesting that there could be a run on the funds if Greece headed toward default, as now seems likely.

Investors have $2.7 trillion in the funds, money which is supposed to hold only “safe” investments such as government-issued bonds.

The logic was, European banks were highly exposed to the Greek problem, and money funds were in turn highly exposed to the banks. Money market mutual funds are supposed to hold their value steady at $1, but problems at the Reserve Primary Fund after the Lehman collapse are still fresh in investors’ minds. The $62.5 billion fund closed after Lehman debt it held was rendered worthless in the 2008 crisis and a run of redemptions on the fund ensued.

Now it looks as if the big money funds have begun to move out of their bank exposure, a sign of withering faith in the ability of Europe to pull off its scheme of robbing Peter to pay Paul across the eurozone.

Fitch Ratings puts the exposure to Spanish and Italian banks at 0.8 percent, down from 6.1 percent in 2009, reported the Financial Times.

The 10 largest prime money market funds in the United States cut their European bank exposure by 8.7 percent in June, the newspaper reported.

There might be even bigger problems ahead, now that Congress seems bent on playing a game of chicken with the debt ceiling. Money market mutual funds hold $684 billion in U.S. Treasury debt and another $491 billion in repurchase agreements collateralized by Treasury debt, reports USA Today.

As was the case with the Lehman collapse, the problem was not so much the bad debt — the United States is nowhere near defaulting, even if the debt ceiling debate ends badly — but panic: Fearful investors could stampede the funds for redemptions, resulting in their collapse no matter how unlikely the real risk of loss.

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