Weighing Greece’s Threat to Money Funds

The chance of Greece defaulting on its debt doesn’t pose a danger to U.S. money fund investors—yet. “It would take a very rapid decline, and not just in the smaller European countries” for the debt crisis to inflict losses on U.S. money funds, says George “Gus” Sauter, chief investment officer at Vanguard Group. “You’d probably have to see Spain and Italy get into difficult shape.”

Money funds could be hurt by a default because they hold debt issued by European banks that, in turn, have lent to Greece and other European countries with shaky finances. U.S. money funds that buy corporate debt had about $800 billion, or half their assets as of May 31, in securities issued by European banks, Fitch Ratings estimated. At the end of 2010, European lenders held more than $2 trillion in loans to Greece, Portugal, Ireland, Spain, and Italy, the most indebted European countries, the Bank for International Settlements estimates. “It’s not about whether Greece defaults, it’s what happens after that,” says Alex Roever, head of short-term fixed-income strategy at JPMorgan Chase.