In his press confence following the FOMC’s June meeting, Gentle Ben Bernanke fielded a question from a New York Times reporter on the potential effects of a Greece default. In his answer was a comment about money market mutual funds that struck fear in the hearts of those who remember 2008, when a money market “broke the buck.” Money market Funds are always priced at $1.00 per share; what changes is their yields. In 2008 it was the result of Lehman Brothers failed, marking the extent of the financial crisis. Prior to that it had only happened once, in 1994.
Here’s part of what he said in response:
So we have asked the banks to essentially do stress tests and ask, looking at all their positions, all their hedges, what would be the effect on their capital be if Greece defaulted. And the answer is that the effects are very small. It’s also the case that — well, we don’t oversee the money market mutual funds. We have been kegeping a close eye on that situation.There again, the situation is similar in some sense in that except — 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 very substantial exposure to European banks in the so-called core countries: Germany, France, etc. So to the extent that there is indirect impact on — on the core European banks, that does pose some concern to money market mutual funds. And is a reason why the Federal Reserve and other regulators are continuing to look at ways to strengthen money market mutual funds.In terms of the impact of the problem in Greece on the United States, as I’ve indicated, the direct exposures are pretty small. And we’re doing all we can to monitor those exposures. However, as we saw in a small situation, a small case last spring, a — disorderly default in one of those countries would no doubt roil financial markets globally. It would have a big impact on credit spreads, on stock prices, and so on.
When thinking of one’s portfolio it’s hard enough to stomach a loss, but in a money market fund it’s unfathomable. Not to worry, dear client, we use the Federated money market funds. They’ve never owned any Greek debt and only hold debt of the best of the best global banks. The contagion effects–get to know that phrase–are what should keep folks up at night. After Greece is Portugal, then Spain.
According to John Mauldin–in his June 25 letter,
“because if Greece is allowed to go, there is real reason to believe that the problems will spread arther quickly to the rest of peripheral Europe…By the way, another source notes that US money-market funds are not rolling over the commercial paper to some of the banks (like Spanish ones), so there is a liquidity squeeze coming to European banks in peripheral countries.”
As Deborah Cunningham, Chief Investment Officer for Federated’s money markets put it in a Wall Street Journal article on the subject,
The problem is perception as much as reality. Though only one fund officially broke the buck in 2008, it caused a crisis for the whole industry. “It’s the contagion effect that people are looking at,” Ms. Cunningham says.
If you’re concerned about your non-Federated money market, one thing to look for is something like “Prime” in the fund’s name. “Federal” or “Government” or “Treasury” should ease your conscience, although prospectuses often leave enough leeway for them to invest in just about anything.