Money Funds’ Cuts to French Banks Could Force Sales

U.S. money-market fund managers have cut their lending to French banks at a pace that may force the banks to raise capital by selling assets, according to William Prophet, a desk analyst at Deutsche Bank Securities Inc.

Prime money funds in the U.S. reduced their holdings in certificates of deposits issued by French banks by about 40 percent in the three months through Aug. 11, Prophet wrote in a Sept. 9 report, based on a review of seven of the 10 largest funds eligible to purchase corporate debt. The proportion of the remaining holdings maturing in less than a month increased to 56 percent on Aug. 11 from 17 percent on June 11.

“What’s happened very recently is simply unsustainable,” Prophet wrote. “While a decent amount of funding is evidently still available to the French banking system, it is all migrating towards the very front end of the money-market curve, and regulators no longer look the other way when this happens.”

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. Moody’s Investors Service may cut the ratings of BNP Paribas (BNP) SA, Societe Generale (GLE) SA and Credit Agricole SA (ACA) this week because of their Greek holdings, two people with knowledge of the matter said.

Higher Rates

Alex Roever, an analyst with JPMorgan Chase & Co., published a similar note Sept. 9 reporting that U.S. money funds’ combined holdings in French CDs and commercial paper declined $47 billion in August. Banks in the Netherlands and the U.K. lost $17 billion and $15 billion, respectively, in funding, the New York-based bank said.

Vanguard Group Inc. eliminated holdings from French, Spanish and Italian banks in its only prime fund by the end of 2010, said David Glocke, head of taxable money-market funds at the Valley Forge, Pennsylvania-based firm. The fund’s holdings in all European banks was 10 percent as of Aug. 31, down from 15 percent at the end of July, he said in a telephone interview.

Legg Mason Group Inc., based in Baltimore, said on Aug. 12 its U.S. money-market funds won’t buy new debt from French banks because it may be hard to sell if investors grow more bearish on Europe.

Investors charged BNP Paribas, Societe Generale and Credit Agricole an average of 6.7 basis points more to borrow three- month commercial paper on Sept. 8 than the rate the lenders said they could pay in the London interbank offered rate market, according to two buyers who asked not to be identified because the talks are private. As recently as July, the banks received rates on commercial paper, or short-term debt, that were lower than Libor.

Asset Sales

Deutsche Bank’s Prophet said U.S. money-fund holdings of CDs from banks across Europe fell about 31 percent to $125 billion in the three months ended Aug. 11.

“If the amount of unsecured European bank funding being provided by the U.S. money funds continues to shrink (both in size and in duration), there will eventually be asset sales,” he wrote.

Societe Generale said today it planned to free up 4 billion euros ($5.44 billion) in capital through asset sales by 2013 to reassure investors about its finances. The Paris-based bank holds about 900 million euros in Greek bonds, Societe General said today in a statement.

Federated Investors Inc. (FII), the third-largest U.S. money-fund manager with $224 billion at the end of July, according to Crane Data LLC in Westborough, Massachusetts, hasn’t changed its level of holdings in banks in France, or across Europe.

‘Best Relative Value’

The Pittsburgh-based firm has 13 percent to 15 percent of its prime funds in French banks, including all three banks cited by Moody’s for possible downgrade, said Deborah Cunningham, Federated’s head of money funds.

A Greek default would be an “earnings event” for the French banks, and not threaten their ability to repay short-term investors, she said.

The threatened downgrade wouldn’t affect short-term ratings, according a June 15 statement from Moody’s.

“We’re comfortable that with the information disclosed to us, they continue to represent the best relative value available to us right now,” Cunningham said in a telephone interview.

U.S. money funds increased their holdings of European debt from 38 percent of assets in the second half of 2006 to more than half in June, according to Fitch Ratings. The increase was driven by the banks’ demand for dollar-based holdings and the decreased supply of U.S. bank-issued debt, the London-based company said.

The analysis was produced by the bank’s sales and trading department and not its research department, the report said.

To contact the reporter on this story: Christopher Condon in Boston at ccondon4@bloomberg.net

To contact the editor responsible for this story: Christian Baumgaertel at cbaumgaertel@bloomberg.net

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