Counterparties: Europe’s shrinking money funds

By Ben Walsh
September 5, 2012

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The sovereign debt crisis has put European money market funds in an intolerable position. Many European MMFs promise not to “break the buck” — or let the net asset values of their holdings fall below 1 euro per share. At the same time, these funds are following their US counterparts by avoiding an ever-growing pool of risky (and high-yielding) continental assets.

Unfortunately for funds obliged to invest inside the euro zone, short-term assets are increasingly moving toward negative yields. This, of course, is bad news for fund managers and investors alike. Fund managers, the FT’s Ajay Makan writes, are now becoming a lot less willing to swallow their losses:

Four of the biggest money market fund managers have told the Financial Times that along with the rest of the industry they are looking at ways of passing on negative returns to investors.

But with interest rates on short-term French and German government debt in negative territory as investors scurry for safety, most money market funds now offer no yield to new investors. The European Central Bank last month said it could start charging banks to hold their cash overnight, which means bank deposit rates may also turn negative.

European MMFs are looking for clever ways to break the euro without actually letting NAV drop: “options include reducing the number of shares investors hold in the fund to reflect negative income … asset managers could also levy fees outside the fund structure to reflect negative yields without reducing the net asset value”.

That might sound clever enough to keep mass hysteria at a minimum, but it changes nothing of the economics for fund investors. And the stakes are high. (Remember the Reserve Primary Fund from 2008?)

To people like Mary Schapiro, Daniel Tarullo and John Gapper, the long-delayed reform in MMFs is a matter of systemic risk. The problems faced by euro MMFs show that there are risks, even without Lehman-style defaults. Last week, Gapper wrote that MMFs have become an illusory oasis of safety for corporations and have left the financial system resting on “quicksand”:

the old-fashioned bank run, with depositors lining up outside banks to withdraw cash, has been updated to corporate treasurers wiring money from money market funds at any hint of trouble … the structure of the funds makes them especially prone to a run.

Ben Walsh

On to today’s links:

New Normal

Bill Gross: “The age of credit expansion which led to double-digit portfolio returns is over” – PIMCO

Facebook

Mark Zuckerberg will not be selling any Facebook stock anytime soon – WSJ

Liebor

The CFTC was warned of “enormous” Libor fixing 15 years ago – American Banker

NC’s treasurer on Libor: “We think this could be as big as the mortgage crisis settlement” – NYT

Hope/Change/Etc.

How African Americans have fallen behind under Obama – Bloomberg

Revolving Door

“Dear SEC Friends” and other cozy emails between the regulator and Wall Street – Bloomberg

The top industries for revolving-door connections with regulators – Opensecrets.org

EU Mess

The ECB is reportedly planning unlimited sterilized bond buying – Bloomberg

The ECB is setting itself up as a shadow government for various European nations – Matt Yglesias

Financial Arcana

What Matt Taibbi got wrong about private equity in his latest opus – Fortune

The implications of the NY AG’s private equity tax inquiry – NYT

Strangely Existential

15,000 reporters stare into the staggering, newsless abyss of political conventions – Huffington Post

Are you better off without dumb campaign questions? – Ezra Klein

TBTF

Big banks’ $29 billion cookie jar for litigation expenses – WSJ

Politicking

Deval Patrick’s misleading claims about Romney’s record in Massachusetts – WaPo

Alpha

Hedge funds are having yet another crappy year – Covestor

China

China just has too much damn capital – Also Sprach Analyst

And, of course, there are many more links at Counterparties.

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