Econintersect: The Federal Reserve Bank of New York reports that the percentage of holdings of European debt by U.S. Money Market Funds has declined recently. One specific example given in the report is a decline from the second half of 2009 (55% of assets) to February 2012 (33% of assets in European debt). In absolute amounts (rather than percent of assets) the cutback in European debt holdings is much more severe. For example, in just eight months of 2011 (May to December) the European holdings of U.S. Money Market Funds fell by 45%!
There is a reason for the dollar decline to be so much larger than would be thought based on per cent of assets declines: U.S. Money Market Funds have been losing assets for several years. As reported by GEI News recently, since the end of 2008 assets in Money Market Funds have declined at a compound annual rate of 10.8%. The rate is slower in 2012, but still was significant (7.7% annual rate for a recent four month period).
Thus, the dollar decline for European debt in U.S. Money Market Funds is the product of a shrinking percentage of assets multiplied by a declining total amount of assets held.
From the New York Fed report:
..... U.S. money market funds (MMF) that are the main holders of this debt can withdraw from further debt purchases prior to deteriorations in the perceived credit quality of banks either because they fear other money funds will also withdraw, or more often because they fear such exposures could result in redemptions by their own customers. Such a pullback occurred during the subprime crisis here in the United States and has recurred during the ongoing European debt crisis. Estimates from Fitch Ratings indicate that, from May 2011 to December 2011, the ten largest U.S. MMFs reduced their exposure to European banks by 45 percent. As a result, MMF exposure to Europe, as a share of total assets, has fallen from 55 percent in the second half of 2009 to about 33 percent in February 2012.
- The European Debt Crisis and the Dollar Funding Gap (New York Fed Report,08 August 2012)
- Money Market and Stock Mutual Funds Losing Assets (Jillian Friesen and John Lounsbury, GEI Investing, 20 July 2012)