Europe debt crisis rattles U.S. money market funds
Wall Street is keeping a close eye on the $2.7-trillion money market mutual fund industry amid concerns over some funds’ investments with Europe’s biggest banks.
The government debt crisis in Europe that has led to bailouts of Greece, Ireland and Portugal by the rest of the continent has raised fears of a “contagion” that could spread through the global financial system.
That’s what occurred in 2008 after the failure of U.S. brokerage Lehman Bros., as shock waves rippled out and banks and other lending institutions began to cut off credit to one another.
A large money fund, the Reserve Fund, collapsed as investors fled after learning the fund owned debt of Lehman. The U.S. quickly moved to temporarily guarantee all money fund assets.
This time, there is no sign that the financial system overall is facing a 2008-style meltdown. But investors’ nervousness has been evident in a new surge of buying in the U.S. Treasury bond market, the classic haven in times of market turmoil.
Federal Reserve Chairman Ben S. Bernanke was asked at his news conference Wednesday whether the U.S. banking system was at risk if Greece defaulted on its bond debt, a move that many experts say is inevitable.
Bernanke said that although U.S. banks had little in direct financial holdings or loans in Greece, Ireland and Portugal, they had “significant exposures” to Europe’s largest banks in countries including Germany, France and Britain. Those banks, in turn, have major investments and loans in the weakest countries.
Bernanke also singled out money market funds, which make very short-term loans to banks and other institutions, as an area of concern in terms of European investments.
Fitch Ratings said in a report this week that the biggest U.S. money funds had about 50% of their assets in debt or certificates of deposit of the largest European banks.
By law money funds are supposed to invest in only the highest-quality securities. Over the industry’s 40-year history there have been few instances of problems with fund investments, which typically mature in a matter of weeks or months.
Although investors pulled a net $42 billion from the funds over the last two weeks, much of that probably reflected companies’ use of fund assets to pay taxes due June 15, said Pete Crane, head of fund tracker Crane Data.
Even so, Crane said the rush of money into short-term Treasury debt this week reflected moves by some fund managers to cash out of European securities and bring the money home to the U.S. as a precaution.
