US Money Market Funds likely the Contagion Link to the PIIGS crisis

How vulnerable is the US to the PIIGS debt and entitlement crisis?

From Bloomberg, (bold emphasis mine)

U.S. money funds eligible to buy corporate debt had about $800 billion, or half their assets as of May 31, in securities issued by European banks, Fitch Ratings estimated. European lenders held more than $2 trillion at year-end in loans to Greece, Portugal, Ireland, Spain and Italy, the most indebted European countries, the Bank of International Settlements estimated...

European Union leaders vowed June 24 to prevent a Greek default as long as Prime Minister George Papandreou pushes a $78 billion euro ($111 billion) package of budget cuts and asset sales through Parliament this week. Greece needs to cover 6.6 billion euros ($9.4 billion) of maturing bonds in August.

“Money-market mutual funds still remain vulnerable to an unexpected credit shock that could cause investors to doubt the ability to redeem at a stable net asset value,” Eric Rosengren, president of the Federal Reserve Bank of Boston, said in a June 3 speech. Some funds have “sizable exposures” to European banks through short-term debt, he said.

The $2.68 trillion money-fund industry is the biggest collective buyer in the commercial paper market.

The bankruptcy of Lehman Brothers Holdings Inc. led to the Sept. 16, 2008, closure of the $62.5 billion Reserve Primary Fund when it suffered a loss on debt issued by the bank. Reserve Primary triggered a wave of redemption requests when it became the first money-market fund in 14 years to expose investors to losses.

Customers were denied access to most of their cash for months as the fund liquidated. Investors, fearing that other funds might fail, withdrew $230 billion from the industry by Sept. 19 in a run that threatened to cripple issuers of short- term debt.

Money market funds are limited to securities that can be converted into cash within 13 months.

JPMorgan’s Roever and Peter Rizzo, senior director of fund services at credit rater Standard & Poor’s in New York, said U.S. managers have been reducing their European bank holdings and shortening the average maturities of those remaining. That would allow them to withdraw more quickly without having to sell securities into a potentially illiquid market.

S&P estimated that 80 percent of European bank holdings is limited to three months or less, and 95 percent to six months or less among the 500 U.S. and European money funds it rates.

And this is partly why news feeds of proposed continued buying by the US Federal Reserve of US treasuries continue to stream

From another Bloomberg article,

The Federal Reserve will remain the biggest buyer of Treasuries, even after the second round of quantitative easing ends this week, as the central bank uses its $2.86 trillion balance sheet to keep interest rate slow.

While the $600 billion purchase program, known as QE2, winds down, the Fed said June 22 that it will continue to buy Treasuries with proceeds from the maturing debt it currently owns. That could mean purchases of as much as $300 billion of government debt over the next 12 months without adding money to the financial system.

As I earlier noted, even if QE 2.0 does officially end this month, this proposed reinvestment program serves as transitional QE. Eventually whether it is QE or another name, asset purchasing programs by the US Federal will continue.

This also lends credence to the view that QE 2.0 may have been put in place to save foreign (European) banks in order to diminish contagion risks.

At the end of the day, it’s been all about saving the international banking cartel under the guise of saving the economy.