There’s been a lot of talk about what the latest eurozone deal on Greece means for Europe. But Americans may also be wondering what it means to them.
The New York Times flicked at this today. U.S. money market funds are the real sore spot for Americans when it comes to the eurozone crisis. They hold billions in European banks’ debt, which, according to some estimates out this summer, could add up to as much as half of the $1.6 trillion in prime money market fund assets. Some analysts think money market funds should be safe under the new plan to bail out Greece, but I’m a bit more skeptical.
“Money-market funds are at least three steps removed from any Greek debt. Greece would have to take down Spain or Italy in order to become a threat to the French banks which money funds hold the debt of,” said Peter Crane, president of Crane Data, which tracks such funds.
The thinking here is that the biggest threat to Europe is ‘contagion,’ or the spread of investor fears about Greece to other shaky eurozone countries like Italy and Spain, which would force bond prices in those countries to rise even higher and make their prospects of paying down debt all the more difficult. Those dynamics, as in Greece, could lead to more bailouts for Italy and Spain, which would max out the eurozone’s existing bailout fund and lead to a new round of squabbling between Germany, France, and European banks on who’s picking up the tab.
But Greek contagion isn’t the only way the eurozone crisis could spread. In fact, the troubles facing Italy and Spain may be less related to what’s going on in Greece than European leaders want to admit. On the blog VOX, economists Paolo Manasse and Giulio Trigilia have a great chart showing that, over time, Italy’s rising borrowing costs have had less and less to do with broader eurozone fears and more to do with Italy’s own problems. The chart shows that, at the beginning of 2009, euro fears accounted for nearly 100% of Italy’s rising borrowing costs; by April of this year the euro share had fallen to 40%. Manasse and Trigilia:
The message here is that the market is increasingly judging Italy on its own merits. Blaming speculation against and contagion from Europe is not only pathetic, it is wrong.
Indeed, if Italy’s problems are more homegrown, then European leaders have much bigger problems in store, regardless of what happens in Greece. Their latest plan doesn’t provide a mechanism for the eurozone to deal with crises in Italy and Spain, as Michael Schuman aptly points out:
The package for Greece does not directly deal with the debt problems elsewhere in the euro zone. Yes, the new agreement eases the terms of bailout loans to Greece, Ireland and Portugal, and offers other countries (like Spain and Italy) some precautionary financing and assistance. But there is no comprehensive arrangement in place to handle indebted euro members. In fact, Europe’s leaders went out of their way to convince private investors that this package for Greece is NOT a precedent for future bailout arrangements, as the final statement makes obvious.
“As far as our general approach to private sector involvement in the euro area is concerned, we would like to make it clear that Greece requires an exceptional and unique solution.”
So what does this all mean for the U.S.? A messy crisis in Italy would put a much bigger dent in U.S. money market funds, which are heavily invested in French and German banks. The French and Germans, in turn, have heavy exposures to Italian debt. French banks hold just under half of the $867.3 billion Italy owes in bank debt, according to the Bank of International Settlements, while their exposure to Greece is only $56.7 billion. The bottom line? The path back to solvency will be a long one for Europe, no matter how many more fires European leaders attempt to stomp out in Greece. And American investors can’t yet assume they’ll be shielded from the heat.