Wells Fargo Advantage Fund's latest "Overview, strategy, and outlook as of February 29, 2012: Money market overview by Dave Sylvester" says, "We wrote about the credit situation in Europe at some length in our commentary dated January 31, 2012. At that time, we talked about investors who, reassured by the European Central Bank's (ECB's) first Long-Term Refinancing Operation (LTRO) on December 21, 2011, were once again buying paper from European issuers, thereby driving yields lower. Recall that through the LTRO, the ECB offers unlimited amounts of collateralized loans to its banks for a three-year term at its benchmark rate of 1%. The banks also have an option to repay the loans after the first year. The twin objectives of the LTRO seem to be to get the banks over the hump of refunding their maturing 2012 debt, as well as enable them to purchase large amounts of sovereign debt.... The LTRO has been variously described as a rate cut, quantitative easing, and bank capital injection all in one.... Just as things were starting to cool down on the European credit front, Moody's threw a little gas on the bank credit quality fires when, on February 15, the rating agency announced that it would review the ratings on 17 "global capital markets intermediaries," with the average standalone credit assessment moving down a couple of notches, from A2 into the range of Baa. This announcement probably shouldn't have been the surprise to the market.... But, surprised the markets were. It might have been due to the general reasoning for the review.... Well, it's pretty hard to argue with [Moody's comments] especially the part about the "more fragile funding conditions" and "wider credit spreads," since it clearly gets more challenging and expensive to borrow money with a P-2 short-term rating rather than P-1, as may now happen to nine of these 17 firms. Still, even if all nine institutions that could potentially be downgraded to P-2 were, they would still remain First Tier-eligible investments for Rule 2a-7 money market funds, as long as they retain their top-tier ratings from at least two other rating agencies. Already, there has been some movement to drop ratings from Moody's and add Fitch ratings to securities that receive credit support from some of these institutions. Therefore, a P-2 rating does not preclude investments by money funds that are, after all, required to make their own independent assessment of credit quality. But with the backdrop of the still-shaky credit picture in Europe, and the possibility of sweeping changes in the regulations governing money market funds, let us just say that while the action by Moody's might be justified, it was not exactly a confidence builder."
