MONEY MARKETS-U.S. money funds add euro zone debt in Jan

Thu Feb 9, 2012 2:18pm EST

* Money funds add euro zone debt for 1st time since April

* Funds' euro zone debt holding still 62 pct below peak

* French bank paper enjoys revival on fewer worries

By Richard Leong

NEW YORK, Feb 9 (Reuters) - U.S. prime money funds increased their holdings of euro zone bank securities in January for the first time since April 2011, suggesting reduced fears about the euro zone debt crisis spiraling out of control, a bank research report said on Thursday.

These ultra short-term funds, which are seen as alternatives to bank savings accounts, added $27 billion in euro zone bank paper last month, bringing their euro zone debt holdings to $181 billion, a J.P. Morgan report showed.

U.S. money funds had been a major source of cash for euro zone banks prior to a flare-up of the region's debt crisis last spring. Their tiptoe back into the region is a sign that there might be some stability in funding for euro zone banks, which have relied heavily on the European Central Bank for funding.

"It's not a big number, but we might have marked a turn here," said Alex Roever, short-term fixed income strategist at J.P. Morgan Securities in New York, who headed the group that published the report.

U.S. prime money funds can invest in securities besides U.S. government debt. They had combined assets of $1.052 trillion at the end of January, accounting for roughly 40 percent of the money fund industry.

Fears about a messy Greek default, together with the heavy debt loads of Italy and Spain, the euro zone's third- and fourth-biggest economies, caused a stampede out of euro zone debt by U.S. money funds last year.

Their holdings of euro zone debt at the end of January was $298 billion, or 62 percent, less than the peak seen last May.

"It's a bit of a turning point, but it's probably not going to return to where it once was," Roever said.

Still, Thursday's news that Greek political leaders clinched a long-stalled deal on reforms and austerity measures to secure a second international bailout worth 130 billion euros ($170 billion) should support the notion that the crisis is contained for now.

The latest Greek development could further support appetite for French bank paper among U.S. money funds, which increased their French bank debt positions by $23 billion to $55 billon at the end of January. This was still $186 billion below the peak seen in May 2011, according to Roever.

France has a bigger exposure to Greece than any other euro zone nation. French banks had about $56 billion worth of Greek debt at the end of June 2011, according to data from the Bank for International Settlements.

January's increase in French bank debt among money funds was largely in very short-term securities in the form of repurchase agreements secured mostly by U.S. government securities, Roever said.

Money funds held $28 billion in repos with French banks, or roughly half of their collective debt holdings.

In the meantime, money funds slightly pared their holdings of bank paper from outside Europe in January. Those holdings slipped $3 billion to $553 billion.

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