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Could a Greek default hit you?

By Sheyna Steiner ·
Friday, September 23, 2011
Posted: 2 pm ET

Though the second Greek bailout program engineered by the European Union and the International Monetary Fund is ongoing, an increasing number of reports point to the possible eventuality of a default.

Today, Friday, Germany's finance minister said the second bailout package may need to be re-evaluated as debt inspectors found that the country is behind on implementing economic reforms on which the deal was predicated, the Associated Press reported in "German Minister questions 2nd Greek bailout."

A default isn't a foregone conclusion. This week the finance ministers and central banks of the G20 member countries pledged to do everything possible to support the global financial markets and banking system.

"We will ensure that banks are adequately capitalized and have sufficient access to funding to deal with current risks and that they fully implement Basel III along the agreed timelines. Central Banks will continue to stand ready to provide liquidity to banks as required. Monetary policies will maintain price stability and continue to support economic recovery," the statement released after Tuesday's G20 meeting in Washington said.

But, if Greek does tumble into default, the ramifications will be widespread.

The story "John Hussman: And now, this is what will happen after Greece defaults," on Business Insider on September 20, outlined some of the potential fallout.

Aside from direct casualties of default, including the threat of contagion to other beleaguered Eurozone countries, Portugal, Ireland, Italy and Spain,  damage to the Euro and the European banking system, the U.S. could incur some damage.

One way that individual investors could be directly impacted by a default is through money market funds.

Money market funds already came under intense scrutiny following the 2008 credit crisis, during which one fund, the Reserve Primary fund, dipped beneath the $1 per share price money funds are presumed to strictly hew. As a result, new regulations were ordered and put into place.

Unfortunately, investing in European banks seemed reasonable until recently and European banks hold a lot of debt issued by the now struggling PIIGS.

From "John Hussman: And now, this is what will happen after Greece defaults:"

According to Fitch Ratings, the ten largest U.S. prime money market funds had total assets of $658 billion as of July 31, 2011. Of those assets, $309 billion - an unsettling 47% of the total - represented debt obligations issued by European banks. It is unclear what level of subordination these debt obligations take, but we can expect that in the event of a Greek default, this concentrated ownership of European bank debt by U.S. money market funds will be less than ideal for investor confidence. (As a side note, the money market assets held by the Hussman Funds are in U.S. Treasury funds.)

…In any case, the heavy allocation of U.S. savings to the European banking system strikes me as an awful example of "moral hazard" produced by two forces: the 2008-2009 bank bailouts, coupled with a European regulatory structure that doesn't require those banks to hold any capital against holdings of European government debt, including that of Greece. As we saw in the housing crisis, when a weak regulatory structure encourages unaccountable leverage, and irresponsible monetary policies encourage reaching for yield, the combined result is predictably disastrous.

The effects on money market funds could hit individual investors directly but it might not stop there. The broader economy would likely take a hit as well, possibly ending in another recession, according to the CNBC story, "Greek default could tip U.S. into recession."

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