The following report by Fitch from Tuesday highlights the cross-Atlantic channel through which credit market volatility could spread. US money markets have significant exposure to the European banking system. The worry is that a Greek default or restructuring could produce a panic in which these funds would limit funding of European institutions.
We have seen this even outside of the immediate panic, with Spanish banks like Santander and BBVA being shut out of US-based credit markets last Spring despite apparent capital strength and strong European capital market access. In my view, the right way to deal with this is transparency, strong capital structures, and more differential treatment of solvent and insolvent institutions, not bailouts.
But the concerns about a panic are still clearly warranted.
U.S. prime money market funds (MMFs) continue to have sizable exposures to European financial institutions, a relationship which could affect both sectors. MMFs are a potential channel for eurozone credit market volatility. For European banks, a loss or reduction in MMF funding could create negative perceptions about an institution’s financial strength.