US money market funds have nearly doubled their allocations to European banks over the past 12 months, in a sign of improving investor sentiment towards the region. In the first half of the year, the 10 biggest US money market funds allocated about 15 per cent of their $652bn in assets to short-term deposits and debt securities with eurozone banks, according to Fitch, the credit rating agency.
That represents an increase of nearly 90 per cent since June 2012, when fears over a eurozone break-up were at their peak. US money market funds have traditionally been an important source of short-term dollar funding for banks across Europe. But, in 2011, they were among the first big investors to withdraw money as the crisis in the eurozone escalated.
Martin Hansen, a macro credit analyst at Fitch, said the return of US money market funds was a sign of improving confidence in the eurozone – although he acknowledged that uncertainty remained over the longer term. “We think this will be a new equilibrium for the time being in terms of percentage of assets invested in eurozone banks,” he said. “The eurozone crisis is not over and money market funds have lingering risk aversion to the region, while [eurozone] banks have reduced their appetite for this form of funding, partly because it dissipated so quickly.”
French banks have been the main recipients of money market funds’ recent largesse. Funds have increased their exposure to them by 255 per cent since the end of June 2012, according to Fitch. The rating agency said actions by the Frankfurt-based European Central Bank were key to maintaining investor confidence in the eurozone. Lending costs in the eurozone financial sector began falling after Mario Draghi, the ECB president, promised to do “whatever it takes” to save the euro in July 2012.
In September the ECB launched a government bond-buying programme targeted at ailing eurozone countries, which encouraged international investors back to the region and triggered a months-long market rally. Nevertheless, the latest money market fund allocations are considerably lower than they were between 2006 and 2011, when US funds had about 30 per cent of their assets, on average, with eurozone banks. When fears over a eurozone break-up increased, much of the money formerly allocated to the eurozone was moved to Canada and Japan.