Although still down compared to pre-Greek debt crisis levels, money-market funds are inching back to Europe.
After all but abandoning them during the Greek debt crisis, when worries over whether the EU would survive were rampant, MMFs are starting to creep back to European financial institutions, according to a report from Fitch Ratings.
To be sure, MMF exposures to eurozone banks remain well below the May 2011 levels. Still, MMF exposures to eurozone banks have increased in each of the last two months, according to Fitch. “An equilibrium appears to be taking shape after the relatively large reductions in allocations to euro zone banks during second-half 2011,” Fitch said.
Although the MMF retreat threatened European bank balance sheets in the heat of the Greek debt crisis, ECB cash injections into the market helped mitigate short-term investor liquidity concerns, which in turn helped mute the impact of departing MMF cash. Still, MMFs remain biased toward risk aversion. One indication of this MMF caution is the continued interest in short-term US treasuries, despite extremely low yields, Fitch said. Holdings of short-term US treasuries and agencies “continued to increase and currently represent slightly more than 20 percent of MMF assets.”
In its report Fitch also noted a trend of spurned European banks not being as receptive to the return of MMFs. “Even if MMFs’ posture to eurozone banks were to continue to improve, it appears that eurozone banks might be less willing to rely on MMFs as a source of U.S. dollar (USD) funding. This partial disengagement stems in large part from the adjustment challenges that some euro zone institutions experienced in the wake of last year’s MMF pullback,” Fitch said.
Fitch said this has been indicated by European banks’ declining holdings of USD assets and a decrease in USD lending. Combined with coming potentially crippling rules for MMFs in the US and Europe – the European Commission is considering whether to label MMFs shadow banking entities and thus eligible for tighter regs – the funds might eventually find themselves on the outside looking in.