Despite lots of evidence to the contrary US money market funds see some stability in Europe’s Banks. According to Fitch Ratings, US prime money market funds (MMFs) increased their exposure to eurozone banks in September, for the third consecutive month.
Fitch noted that exposure to French banks rose to 3.9 percent of MMF assets, a new high for 2012 and a 44 percent increase since the prior period.
The rise in exposure, though slight, happens as the European crisis seems to be worsening: Spain unemployment rising dramatically as its cost to borrow; and Greece is almost certain to leave the eurozone within the next 18 months. Even the vaunted German economy is showing signs of a slowdown.
As a result, most of the region’s banks continue to struggle. For instance, Spain’s biggest bank, Banco Santander, recently reported that its third-quarter profit fell more than 94 percent. And on October 25, Standard & Poor’s downgraded 10 French banks, including BNP Paribas and Societe Generale. S&P said housing was one factor behind its downgrade (Santander said pretty much the same thing), the rater seeing a likely fall in house prices of between 10-15 percent over the next two to three years. It should be noted that S&P’s downgrade of BNPP actually puts it in line with Fitch’s outlook.
Fitch said that as of end-September, MMF exposure to eurozone banks represents 10.6 percent of total holdings, “which is a 16 percent increase on a dollar basis since end-August 2012.” Still, Fitch said, overall US MMF eurozone bank exposure remains 70 percent below end-May 2011 allocations. Given both the lingering investor caution towards the eurozone and banks’ diminished appetite for this potentially unstable form of wholesale funding Fitch believes this level is unlikely to be fully retraced in the intermediate-term.
Nonetheless, Fitch said indications point to a continued increase in exposure. For instance, Fitch said a “declining proportion of European and eurozone exposure was in the form of repurchase agreements (repos). This reduction in secured exposure is another potential sign of a more positive investor posture towards banks in the region.”