Credit concerns have once again taken center stage as the treasury community closely monitors its cash investments. These fresh concerns are relevant to U.S. cash and short-duration investors because prime money market funds are major investors in European financial debt. Approximately two-thirds of commercial paper and one half of jumbo bank deposits available to U.S. investors are obligations of non-U.S. financial institutions. We estimate that 44% of a typical U.S. prime fund is exposed to non-U.S. financial debt. For large prime funds, 69% of assets are estimated to be non-U.S financial debt, of which 55% is European, 16% eurozone, and 4.6% southern European. No direct exposure to Greece or Portugal was found but the significant dispersion of exposure among large prime funds should continue to be a reminder of the importance of credit monitoring in prime funds.
Credit concerns regarding southern European sovereign borrowers (Greece, Portugal and Spain) have been the talk of global markets in recent weeks. Ambitious attempts by the European Union to infuse liquidity into the eurozone sovereign debt market seemed to have unnerved investors even more.
These concerns are particularly relevant to U.S.-based cash and short-duration investors, most notably to those who invest in prime money market funds, because the U.S. money markets have become a major playing field for non-U.S. financial firms in recent decades. Global financial systems are highly interconnected and it may no longer be sufficient to simply assess direct credit exposures to the affected entities; rather, one may also need to evaluate secondary derivative exposures, namely financial institutions with a significant presence in the southern European region.
In this paper, we attempt to quantify the concentration of foreign financial institutions in the U.S. short-term debt market. By identifying the concentration of bank issuers with southern European exposure in several large prime money market funds, we gain a glimpse of relative risk management among major participants in this debt market. With this exercise, we hope to remind investors that due diligence remains the top priority today in liquidity investments, whether it relates to money market funds or to separately managed accounts.
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