Money Funds Cut European Bank Debt

U.S. funds reduce holdings of European bank assets to lowest since 2006.

Money-market mutual funds reduced lending to European banks further last month, with the biggest U.S. funds cutting their holdings to the lowest in at least five years, as the region’s sovereign debt crisis worsened.

The 10 biggest U.S. funds eligible to purchase corporate debt, with a combined $676 billion, reduced European bank assets to 42 percent of holdings, the lowest level since at least 2006, Fitch Ratings said today in a report. European funds also are cutting holdings of Spanish and Italian assets and shortening the maturities of the investments they keep, Fitch said in a separate report this week.

The sovereign-debt crisis has raised concern that money-market funds may suffer losses if banks fail to meet obligations as a result of defaults. Money funds’ withdrawal has made it difficult for some European banks to get longer-term funding and forced the European Central Bank to step in.

“The general feeling out there is hostile to risk,” said Peter Chatwell, a strategist at Credit Agricole SA in London. “The crisis has been going on for so long people are getting entrenched in that sort of mindset. The longer it goes on, the greater the likelihood the central banks will have to step in and take action.”

Group of 20 finance chiefs pledged yesterday to address rising risks to the global economy and pushed Europe to contain its sovereign debt crisis after concern the world is on the brink of another recession sent stocks tumbling.

The MSCI All-Country World Index yesterday dropped into a bear market for the first time in two years.

ECB Sees Mismatch
The European Central Bank may introduce 12-month loans to banks to ease funding strains, Governing Council member Ewald Nowotny told reporters in Washington today. The ECB last conducted a 12-month loan in December 2009.

“There is no immediate liquidity problems for banks, but what we do see is a mismatch where banks have difficulties refinancing themselves longer term,” Nowotny said.

The central bank has already reintroduced a six-month loan and continues to offer banks as much cash as they want at its benchmark rate in weekly, monthly and three-month refinancing operations.

European banks concerned about their peers’ potential losses have reduced lending to each other, preferring to leave their cash at the European Central Bank. The average amount banks deposited with the ECB in the previous 10 days is 140 billion euros ($189 billion), compared with this year’s mean of 49 billion euros, according to the Frankfurt-based central bank.

French Banks
European money funds continue to hold the debt of the strongest sovereigns and the financial institutions of France, Germany and the U.K., Fitch said in a Sept. 21 report.

Debt, certificates of deposit and other securities issued by the banks and held by U.S. funds fell by about $26 billion last month, Fitch said. The funds’ holdings in French banks fell 19 percent in August, in dollar terms, to about $76 billion, and 34 percent since the end of May.

French financial firms had $672 billion in public and private debt in Greece, Portugal, Ireland, Italy and Spain at the end of March, the most exposure to the euro-area’s troubled countries, according to the Basel, Switzerland-based Bank for International Settlements.

What the U.S. funds have left in French banks has moved to shorter maturities. Of cash placed in French certificates of deposit, the portion due to expire in seven days or fewer rose to 28 percent from about 7 percent two months earlier.

Looking to Australia
The U.S. funds’ holdings in U.K. banks declined 14 percent in August, while German holdings climbed 8 percent. The funds also boosted lending to banks in Australia, Canada and Japan.

Fitch’s survey included funds that represent about 45 percent of the $1.49 trillion in U.S. prime money funds. The funds’ holdings in European bank securities were the lowest within Fitch’s historical time series, which dates to the second half of 2006.

U.S. money funds have put more of their assets into domestic securities as European holdings have shrunk, David Glocke, head of taxable money-market funds at Valley Forge, Pennsylvania-based Vanguard Group Inc., said in a telephone interview.

Vanguard’s money funds have about 50 percent of their assets in U.S. Treasury and agency paper, Glocke said. Prior to the credit crisis in 2008, those securities represented about 10 percent of holdings, he said. European banks accounted for 10 percent of holdings as of the end of August, down from 15 percent the month before, Glocke said.

Bloomberg News


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