U.S. Money Funds Cut Europe Bank Debt Stake as Crisis Deepened, Fitch Says

The top U.S. prime money-market mutual funds cut their assets invested in securities issued by European banks last month to the lowest level since 2008 as the region’s debt crisis got worse, according to Fitch Ratings.

The 10 largest U.S. money funds eligible to purchase corporate debt, with $658 billion in assets, had 47 percent of their total holdings in securities issued by European banks as of July 31, a Fitch report published today said. That was down from 48.7 percent as of the end of June and the lowest since 45.4 percent at the height of the global financial crisis in the second half of 2008, according to Fitch data. Prime money-market funds’ holdings of European debt are down from 50.2 percent at the end of May.

U.S. funds are cutting their holdings in European banks on concern the financial institutions may face funding problems as the sovereign-debt crisis escalates. Pledges of 365 billion euros ($526 billion) in official loans to Greece, Portugal and Ireland, and 96 billion euros of bond purchases by the European Central Bank have yet to fix the finances of those countries or prevent speculative attacks on Spain and Italy.

Global stocks plunged and government bond rallied last week on speculation European banks lack sufficient capital and as the economic recovery showed signs of stalling. The ECB said last week a lender borrowed dollars for the first time in six months under its liquidity-providing operation.

Fitch’s sample of the 10 largest funds represented 43 percent of the Investment Company Institute’s estimate of about $1.53 trillion in total assets under management by U.S. prime money market funds.

Funds’ Investments

The funds’ investments included those in banks’ certificate of deposits, commercial paper, repurchase agreements and short- term notes and deposits.

U.S. prime money fund managers also reduced risk by shortening maturities, according to the report written by Fitch analysts led by Robert Grossman in New York. More than 20 percent of funds’ investment in French banks’ certificate of deposits was in maturities of seven days or fewer at the end of July, a threefold increase compared with the end of June, the report said.

Among European nations, funds had the highest concentration in debt from French banks at about 14.1 percent, followed by U.K. banks at 10.5 percent, according to the report. The funds had no holdings in Italian and Spanish banks, down from an aggregate of 0.8 percent at the end of June.

European banks have been trying to reduce their risk to Greece on concern it may default on its debt and the regions other most-indebted nations. The Bank for International Settlements estimated European lenders held $136.3 billion in loans to Greece at the end of 2010 and almost $2 trillion to Portugal, Ireland, Spain and Italy.

To contact the reporter on this story: Liz Capo McCormick in New York at emccormick7@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net

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