A Greek Default Could Impact Money Market Funds


In “Would a Greek default be automatic doom?” Mark Hulbert of MarketWatch makes the point that both those who predict that a Greek default would be like the Lehman disaster and those who predict that it would be more like the stock market advances after the last four sovereign debt crises (Mexico 1994, Thailand 1997, Russia 1998, and Argentina 2001) are on equally shaky statistical ground and are just speculating. But the conclusion that no one has a valid statistical basis for predicting the systemic effect of a Greek default is unsettling in itself.

Also unsettling is the fact that approximately 50% of the $1.6 trillion of U.S. money market funds owned by 50 million Americans is in the debt of core European banks like France and Germany, which could be weakened by a Greek default. See “In a Greek Default, Higher Risk for Money Market Funds,” by Graham Bowley (New York Times).

“A lot of them are exposed to a risk of a blowup somewhere in Europe,” Ren? M. Stulz, professor of banking and monetary economics at Ohio State University, was quoted as saying about money market funds, adding: “It does present systemic risk.”

Ben S. Bernanke, the Federal Reserve chairman, was quoted as saying: “With very few exceptions, the money market mutual funds don’t have much direct exposure to the three peripheral countries which are currently dealing with debt problems. They do have substantial exposure to European banks in the so-called core countries: Germany, France, etc. So to the extent that there is indirect impact on the core European banks, that does pose some concern to money market mutual funds.”

Even the perception that European banks might have a hard time repaying money market funds could, in a worse case, cause runs on money funds and a market seizure similar to the run on the Reserve Primary Fund, which in turn caused a huge run on all funds. After the Lehman collapse in 2008, the Reserve Primary Fund “broke the buck,” reporting a share price of 97 cents to investors who had long expected an stable $1.00 share price.

Investors have withdrawn $45.6 billion from prime money market funds in the last two weeks (the largest two-week withdrawal since March last year), according to the article, citing data from the Investment Company Institute. That is approximately 2.85% of the $1.6 trillion in U.S. money market mutual funds.

While opinions vary about the outcome of the sovereign debt crisis, investors should exercise caution.