Even If You Don't Think Europe Will Crumble, Now's A Good Time To Cut Money Market Exposure

It’s been my thinking that the US financial system is somewhat immune to the unfolding events in Europe. To be sure, there are some potential losses. And should Europe screw up in their efforts to kick the can down the road, there would be economic consequences. Europe would slow down, that would impact the rest of the globe. But no systemic crisis. That kind of thinking is “out there”. The US has an ocean in between the storm that is brewing.

That may not be the case. Fitch did another of its reports on US Money Market exposure to European banks. (Link to Fitch, but you have to sign up to see the info) . From the report:

Over the past three months, MMF exposure to European banks has been stable, at roughly 50% of total MMF assets.

Huh! 50% is a very big number!

Where is that MMF exposure concentrated? Its mostly in the Core countries:

chart

What banks are dependent on US MMFs for dollar based financing? The list:

My thoughts on this:

chart

When I look at the list of banks and the countries that they are domiciled in my first thought is;

“Don’t worry. These banks WILL NOT default on short-term IOU’s to US MMFs.

So what did I do after coming to the conclusion that this was not a solvency issue and that I needn’t worry about it? I took a decent chunk of money out of MMFs. I bought Bills.

What I’m concerned about is a liquidity problem. And while I am as sure as I can be that those MMF assets are “money good” I just don’t want the hassle and aggravation if one of these funds “Breaks the Buck” (even if it is just for a short period of time). I was earning 1/8% or so on that idle money. I do not take any risks when the return is that low. (Screw you ZIRP [and the Fed] on that one)

There is a better than 50% chance that the wheels just keep coming off in Europe. If the outcome continues to deteriorate this business of the US MMF is going to go mainstream (this has been brought up recently by Jim Grant and a few others). It would only take one fund someplace in the world to go to 99.9 for there to be an issue.

I still say it would not be a true/lasting crisis. What would happen ASAP is that the Fed would open the swap windows with the European Central banks. They in turn would provide the needed dollar liquidity and that would pay down the MMFs.

But wait a minute. The numbers here are at least ½ Trillion. That would be perceived as a Mega Bailout. Something like this would create a fire storm in American politics. This would not be a TARP situation, but I don’t care. That is how the vast majority of Americans would look it at. 

US Bails Out European Banks would be the headline.

We’re not far off from something like this occurring. Like I said, it doesn’t take much for people to head for the exits these days. I already did.

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