U.S. Money Market Funds Slash Exposure to Europe

July 25th, 2011
in econ_news

euro-city Econintersect:  U.S. money market funds are becoming hard to find in Europe due to financial system stresses on the continent.  European banks are facing huge losses as a result of the restructuring/bailout hybrid solution reached last week by EU ministers in Brussels.  Private creditors agreed to take a 21% writedown loss on their Greek debt holdings, according to Reuters.  The same source says about €98 billion of Greek debt is held by European banks.  Of that, about 2/3 is in domestic hands.  That leads to hit for non-Greek banks in Europe to take a loss of €6.8 billion (98 x 0.33 x 0.21 = 6.79).  Reuters says the loss is €5.4 billion, presumably the difference is buried in the minutae of the distribution of the bailout funds.  They have now been increased by additional €15 billion to bring the total to €25 billion.

Follow up:

The pain may not be over according to one observer quoted by Reuters:

"We have long thought that the most likely outcome for Greek bondholders would be that they would take a small haircut first followed by a larger one at a later date," said Gary Jenkins, head of fixed income at Evolution Securities.

"To give Greece a fighting chance they probably need a writedown close to 65 percent."

The Financial Times reported Sunday that U.S. money market funds, key to financing short term debt transactions around the world, have slashed commitments to Europe.  From The FT:

US money market funds have sharply cut their exposure to banks in the eurozone over the past few weeks and reduced the availability of credit, even in stronger countries such as France.

The money market funds, historically crucial providers of short term financing to European banks, have withdrawn from all but extremely short-term lending as concerns about sovereign debt have mounted.

The FT also says that credit supplied by Money Market funds is being curtailed as well by the stockpiling of cash to guard against withdrawals if the debt ceiling is not raised in the U.S.  Reports from France indicate that interest rates are not being effected, just availabilty of funds, which are now much more available only overnight.  A month ago money market loans of 6 and 9 months was not that difficult, according to a French financier quoted by the Financial Times.

A final factoid:  In late 2009 6.1% of U.S. Money Market funds were invested in Spain and Italy.  Today the total is down to 0.8%.

Sources:  Reuters and Financial Times


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