U.S. prime money funds cut euro zone exposure: Fitch

NEW YORK Thu Jan 26, 2012 9:46am EST

NEW YORK (Reuters) - Prime money market funds further reduced their exposure to securities issued by euro zone banks in December because of nagging worries about the region's sovereign debt crisis, Fitch Ratings said on Thursday.

The 10 biggest money market funds tracked by Fitch that can invest outside of U.S. government securities cut their holdings of euro zone bank debt by 16 percent on a dollar basis at the end of December versus the end of November, the rating agency said in a research report.

Since the end of May, the funds reduced their euro zone debt holdings by 72 percent.

U.S. money funds had been a major source of short-term financing for euro zone banks, which accounted for 9.9 percent of their assets.

These funds' assets stood at $644 billion at the end of December, equivalent to 45 percent of the $1.44 trillion of all U.S. prime fund assets.

As euro zone leaders have struggled to develop a comprehensive solution to contain the region's debt problem, money funds have reduced their lending to the region's banks, especially French banks, because of their heavy exposure to Greece and Italy.

The funds cut exposure to French banks by 47 percent on a dollar basis at the end of December from the end of November.

Since the end of May 2011 when the euro zone debt crisis flared up again, the funds' French exposure has fallen 94 percent, Fitch said.

As these funds have sharply scaled down their euro zone bank debt holdings, they have channeled money into perceived safer securities issued by banks in the Nordic region, Japan, Australia and Canada.

At the end of December, prime money funds increased their Swiss exposure by 23 percent from the end of November; Nordic by 3 percent; Japan by 7 percent; Australia by 5 percent and Canada by 3 percent.

The 10 biggest prime funds invested 3.7 percent of their assets in certificates of deposits, commercial paper, repurchase agreements and other short-term debt issued by Credit Suisse (CSGN.VX) at the end of December. This is the highest collective exposure to a single global bank, Fitch said.

Meanwhile, the Swiss bank ranked sixth in its reliance on the biggest money funds for short-term cash. Swedish bank Svenska Handelsbanken (SHBa.ST) was first with 10.7 percent of its short-term securities held by money funds, it said.

(Reporting by Richard Leong; Editing by Padraic Cassidy)