U.S. Money Markets Pulling Back from Troubled Euro Zone Banks

U.S. Money Markets Pulling Back from Troubled Euro Zone Banks
December 12, 2011

The crisis in the euro zone is keeping EZ banks from lending to one another, and U.S. money market funds, which are key providers of liquidity to banks, have been pulling back from the euro zone since May.

The money market funds cut their exposure to European banks by a further 9 percent in October, according to the Fitch ratings agency.

Fleeing the Market

Money market funds have cut their European exposure to the lowest in percentage terms since Fitch started compiling its data in 2006.

CNBC reported:

“Fitch said its sample of the top 10 U.S. money market funds had a $224 billion exposure to Europe's banks at the end of October, down 42 percent from the end of May.

“Funds cut their exposure to French banks by 19 percent in October and by 69 percent since May. They have also shortened maturities, and more than half the exposure to them was for seven days or less at the end of October, Fitch estimated.

“The funds also cut their exposure to German banks by 16 percent and to Nordic banks by 14 percent during October.”

Mitigating Risks

Robert Grossman, managing director of Fitch Ratings, told the Reuters news service, "Recent trends indicate that money funds are pursuing a range of strategies to mitigate euro zone risks, including reducing exposure levels, shortening maturities, and increasing the share of collateralized transactions in the form of repos.”

Bottom line: The euro zone is on the edge of collapse. Either the European Central Bank prints huge amounts of money, or the EZ is done. Huge money printing will, of course, result in major price inflation. If the EZ collapses, member nations will resort to their old currencies and will likely print huge amounts of them. Nations won’t go bankrupt and start over on saner footing, however, because the banks own good chunks of the government paper.

As for U.S. money market funds: If the EZ goes down, don’t expect money market funds to go down with them. I would expect a Fed bailout, if it gets that bad—that is, even more money printing here in the United States.

Robert Wenzel (rw@economicpolicyjournal.com) is editor and publisher of the EconomicPolicyJournal.com Web site, where a version of this article first appeared. Used with permission.