The markets around the world are selling off on the news from Greece as the new leadership is attacking the “barbarous austerity”. As the financial dominos start to drop in Europe, Spain’s ten year yield is back over 6% this morning. One of my concerns has been the amount of U.S. money market fund investment positions outside the United States in search of yield. An estimated 35% of assets of U.S. money market funds are in European holdings. I was very concerned about this last fall, until the U.S. Federal Reserve extended swap agreements to help with the last liquidity crisis. The European bank liquidity issue has been propped up with over $1 trillion Euros borrowed from the ECB called the LTRO. The LTRO is a three year lending operation to European banks. Usually a “lender of last resort” does not need to extend credit to banks for such a long period of time. When European banks unwilling to lend to each other due to increased counterparty risk, the short term spike funds parked at the ECB’s Central Bank Deposit facility is another warning sign and concern for liquidity in the region.
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