In a Greek Default, Higher Risk for Money Market Funds

This is why the powers-that-be fear a Greek default so much.  Remember the post-Lehman liquidity crisis that brought on the 2008 financial meltdown? 

http://mobile.nytimes.com/article?a=810271&f=23

Money market funds have long been a popular haven for conservative investors, but they could become one way that the tremors of the financial crisis in Greece touch the pocketbooks of Americans - about 50 million of them.

For years, the funds in the United States have taken investors' money and lent it out where they can get the best returns. European banks have been a target lately - so much so that about 50 percent of the funds' $1.6 trillion in prime money market assets is in the debt of European banks.

Now that Europe is struggling to contain its debt crisis, these safe investments could be a tad less safe, especially if Greece's Parliament votes down a set of deeply unpopular austerity measures Wednesday morning.

While any losses on money market funds could be minimal, especially compared with the turmoil that could ensue in stock and bond markets, the possible effect on this corner of the financial markets shows how the ripple effects could reach far and wide if Europe cannot resolve its debt crisis. "A lot of them are exposed to a risk of a blowup somewhere in Europe," René M. Stulz, professor of banking and monetary economics at Ohio State University, said about money market funds. "It does present systemic risk."

Some experts and the funds themselves play down the risks, expressing confidence in the underlying safety of the European banks' debt that they own.

A primary fear is that if a European bank indebted to the funds is weakened in the crisis, then it might have a hard time repaying its loans. But even the perception of trouble could, in a worse case, cause financial markets to seize up and send investors rushing to withdraw money. That is what happened after the collapse of Lehman Brothers in 2008 hit one fund that owned Lehman debt, the Reserve Primary Fund, causing a huge run on all funds.

While the author is correct that sovereign debt defaults will have a crippling effect on our global financial system, the most dangerous and biggest systemic risks are unquantifiable, due to the proliferation of over-the-counter, non-transparent trading of credit default swaps.  Due to the high-leverage nature of said cds', when and if peripheral Euro countries default, the collapse of the credit markets will be catastrophic.

Translation?  Economies will tumble, commerce would freeze up, and a trip to the local ATM or bank teller would prove futile.  In other words, good luck.