Moody's Investors Service released a study entitled, "Money Market Funds Continue to Shrink Exposure to European Banks. Moody's press release accompanying the report is titled, "Moody's: Money fund managers acting to avoid risk from European debt crisis." It explains, "While the European debt crisis has intensified in recent months, money market funds have not been materially affected, Moody's Investors Service says in a new report." It adds, "At the end of October the funds had no direct exposure to financial institutions in Greece, Ireland or Portugal, and only one half of one percent exposure to Spanish and Italian financial institutions combined."
Author Rory Callagy comments, "Moody's-rated prime money market funds have worked to reduce their exposure to banks in the euro area, and have accelerated this process in recent months. By further shortening the maturities of their investments, money market funds have been able to manage down European bank exposures and redeploy assets into banks elsewhere. Yet despite their actions, money market funds do continue to face serious challenges.... While we believe the supply problem is manageable, the reduction in the number of high-quality issuers is making managers' efforts to diversify their holdings challenging."
The report says, "Exposure to European banks in Moody's rated money market funds are being winnowed down both by notional dollar amount and tenor. By further shortening the maturities of their investments, money market funds have been able to manage down European bank exposures, often redeploying funds away from stressed European banking systems and into stronger European banks and banks in countries such as Canada, Australia and Japan. Looking forward, active portfolio management should continue to reduce money market funds' exposure to the euro area and strengthen their liquidity profiles, which should put them in a stronger position to navigate future market stresses."
Moody's continues, "As market conditions remain volatile and investors are increasingly sensitive to the credit conditions of banks whose debt is included in their funds' portfolios, investor redemption rates are unpredictable. However, we believe Moody's-rated funds are well-positioned, having all but eliminated exposure to banks in the most sensitive European countries, and increased their liquidity levels, reaching in many cases 36% or higher overnight liquidity."
The report adds, "That said, money market fund managers continue to face challenges related to a narrowing universe of available investments and deterioration in overall portfolio credit quality. While we believe the that the constraints on qualifying assets are manageable, the decline in the overall volume of high-quality issuers is thwarting managers' efforts to diversify their portfolios. `With declining bank credit quality negatively affecting the credit quality of their portfolios, money fund managers continue to maintain large overnight liquidity positions and short tenors on certain bank holdings in order to compensate."
Callagy also writes, "We expect market uncertainty to remain elevated until a clear plan to resolve the major elements of Europe's sovereign debt crisis is agreed upon. Although the wide spectrum of views on the risks for euro area financial institutions makes it difficult to assess the impact of market uncertainty on money market funds, the data contained in this report provide an update on money market funds' management of these risks to date."
