(Bloomberg News) The European debt crisis would pose a threat to U.S. money-market mutual funds if a rash of sovereign defaults caused big banks to fail to meet obligations within the next three months.

"It would take a very rapid decline and not just in the smaller European countries" for the debt crisis to threaten U.S. money funds, George "Gus" Sauter, chief investment officer at Vanguard Group Inc. in Valley Forge, Pennsylvania, said in an interview. "You'd probably have to see Spain and Italy get into difficult shape."

Greek lawmakers are scheduled to vote this week on a five- year austerity plan for the cash-strapped nation to secure more international aid and avoid the euro-area's first sovereign default. Money funds could be hurt by a default because they have lent to European banks that, in turn, have lent to Greece and other heavily indebted European countries.

U.S. money funds eligible to buy corporate debt had about $800 billion, or half their assets as of May 31, in securities issued by European banks, Fitch Ratings estimated. European lenders held more than $2 trillion at year-end in loans to Greece, Portugal, Ireland, Spain and Italy, the most indebted European countries, the Bank of International Settlements estimated.

"It's not about whether Greece defaults, it's what happens after that, and there's uncertainty behind that," Alex Roever, head of short-term fixed-income strategy at JPMorgan Chase & Co. in New York, said in a telephone interview.

Austerity Package

European Union leaders vowed June 24 to prevent a Greek default as long as Prime Minister George Papandreou pushes a $78 billion euro ($111 billion) package of budget cuts and asset sales through Parliament this week. Greece needs to cover 6.6 billion euros ($9.4 billion) of maturing bonds in August.

"Money-market mutual funds still remain vulnerable to an unexpected credit shock that could cause investors to doubt the ability to redeem at a stable net asset value," Eric Rosengren, president of the Federal Reserve Bank of Boston, said in a June 3 speech. Some funds have "sizable exposures" to European banks through short-term debt, he said.

The $2.68 trillion money-fund industry is the biggest collective buyer in the commercial paper market.

The bankruptcy of Lehman Brothers Holdings Inc. led to the Sept. 16, 2008, closure of the $62.5 billion Reserve Primary Fund when it suffered a loss on debt issued by the bank. Reserve Primary triggered a wave of redemption requests when it became the first money-market fund in 14 years to expose investors to losses.