| NEW YORK
NEW YORK Nov 25 Europe is no longer the
forbidden zone for U.S. money market funds, which have been
adding to their holdings of securities from the region's banks
after slashing their exposure during the height of the euro zone
debt crisis two years ago.
Fund managers and analysts said the revived demand for bank
paper in particular from German and French banks is underpinned
by tentative signs the region is climbing out of a recession.
"Europe continues to have the highest shock risk from a
banking perspective than any other region, but clearly those
concerns about Europe's financial shocks have been radically
reduced in the past 12 to 18 months," said Tom Nelson, chief
investment officer at Reich & Tang, a New York-based money
market management firm.
The debt costs of Greece and other cash-strapped euro zone
member nations have fallen sharply this year, partly due to
support from the European Central Bank. This has thawed some of
the reluctance among U.S. money fund managers to hold euro zone
U.S. prime money market funds, which can invest outside of
U.S. government securities, raised their euro zone holdings in
October to the highest level since August 2011, according to a
report by JPMorgan Securities released earlier this month.
Prime money funds' exposure to the euro zone grew by $22
billion to $251 billion last month. Since the end of 2012, the
funds have raised their holdings of that region's bank paper by
$49 billion, JPMorgan said in a Nov. 13 report.
The money funds JPMorgan tracks held nearly $1.1 trillion in
assets at the end of October, equivalent to 42 percent of the
$2.6 trillion U.S. money fund industry. They are major investors
in short-term bank debt worldwide.
However, it is unlikely the 17-nation block will return to
its glory days when money funds held roughly a fifth of their
cash in euro zone bank debt, prior to the onset of the region's
sovereign debt crisis.
France, Italy and Spain, which are the euro zone's second,
third and fourth biggest economies, continue to struggle with
record unemployment and heavy debt loads.
"I say less jitters, I wouldn't say more confidence yet,"
said Deborah Cunningham, chief investment officer of money
markets at Federated Investors Inc in Pittsburgh.
Fund managers also attributed the rebound to the euro zone
banking system showing resilience in the wake of Cyprus's fiscal
woes this past spring, which some traders had feared would
destabilize the bank system.
"People had thought Cyprus was going to be a big problem and
when it wasn't, it just made people more comfortable with the
entire euro zone area which has a lot more depth and strength to
it than was initially thought," Cunningham said.
VIVE LA FRANCE (AND GERMANY)
The bulk of this year's increase in euro zone exposure has
been in French and German bank debt. It grew by $10 billion to
$151 billion and by $9 billion to $43 billion respectively in
Revived demand for French bank debt ranks them fourth in
terms of holdings by country, just behind Canada, JPMorgan
analysts wrote in the report. But their French holdings were
some $73 billion below the peak seen in May 2011.
"France was obviously the biggest concern at one point back
in 2011. They seem to be back on everyone's radar," Federated's
The data were collected prior to Standard & Poor's downgrade
of France's debt rating on Nov. 8 to double-A from
Large French and German banks can now sell overnight and
short-term debt to money funds at the same or slightly higher
interest rates as their U.S., Japanese and Canadian
counterparts. A year ago, they had to offer interest rates
anywhere from 0.05 to 0.20 percentage point higher.
Another factor behind money funds' partial return to euro
zone bank debt has been because securities from countries
including Australia and Canada are perceived as more expensive.
"Canadian and Australian paper have gotten extremely rich,"
Reich & Tang's Nelson said. "In the meantime, the risk and
reward of European paper has become more attractive today than
they did 12 months ago."