US money funds cut euro zone holdings to lowest since 2006-Fitch

Wed Jul 25, 2012 4:55pm EDT

* Prime funds cut euro zone debt on crisis fears

* Biggest funds shifted cash in June to Japan, Nordic countries

* U.S. debt holdings above 20 percent for fifth month

NEW YORK, July 25 (Reuters) - The biggest U.S. prime money market funds reduced their euro zone exposure to the lowest level since 2006 as fears about Spain requiring a full-blown bailout intensified, Fitch Ratings said in a report on Wednesday.

The top 10 prime money funds, tracked by the rating agency, cut their euro zone debt holdings to 8 percent of their combined assets in June from May.

That was the lowest level since Fitch began monitoring these funds' holdings at the end of 2006.

The 33 percent month-over-month decline in their holdings in euro zone debt "stems from both ongoing risk aversion and heightened caution by some European banks and their regulators on using this potentially volatile form of funding," Robert Grossman, managing director at Fitch Macro Credit Research, said in a statement.

The 10 biggest prime money funds had combined assets of $614 billion at the end of June, or roughly a quarter of total U.S. money market fund assets.

These funds reduced their exposure to the Netherlands by 41 percent in June, France by 28 percent and Germany by 26 percent.

As prime money funds, which invest in securities riskier than U.S. government debt, continue to scale back on their euro zone exposure, they have shifted more cash in other parts of world, which are perceived to be financially safer.

They raised their allocations to the Nordic region by 15 percent in June.

Outside of Europe, their exposures to Japanese banks grew 11 percent last month. Their Japanese holdings have doubled since May 2011 and reached their highest level to nearly 12 percent of total fund assets since Fitch began its monthly fund analysis.

The funds' holdings of short-term U.S. Treasuries and agencies exceeded 20 percent of their combined assets for a fifth straight month, which Fitch said is "another sign of risk aversion."