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Money funds pare down Euro CDs

By Sheyna Steiner · Bankrate.com
Wednesday, November 9, 2011
Posted: 11 am ET

In the global economy, events on the other side of the world can have big impacts here at home. For instance, the European debt crisis has loomed over domestic money market funds since the beginning.

Most people in the United States aren't directly holding debt securities from the struggling European countries known as the PIIGS, otherwise called Portugal, Ireland, Italy, Greece and Spain.

But they may be exposed to them through money market funds. Here's how the food chain works: European banks hold debt securities issued by the PIIGS.  American money market funds then purchase securities issued by European banks, such as commercial paper, CDs and other time deposits and short-term notes.

A sovereign default could cause problems for under-capitalized European banks which could, in turn, impact the banks' investor -- American money market funds, among others.

The fate of all the debt securities issued by the insolvent countries is still unknown. The recent bailout deal for Greece obliges banks holding Greek bonds to take a 50 percent haircut on those investments. That deal is dependent on the passage of austerity measures in Greece.

The prospect of sovereign defaults and the possible impact on European banks spurred American money market funds to reduce exposure to European banks this year.

According to recently released data from J.P. Morgan Securities prime money market funds in the U.S. decreased their exposure to European bank securities by $24 billion in October.

The Crane data website reported on the data in a story titled, "Money funds slow Eurozone reductions in October says JPMorgan."

Commercial paper and CDs issued by European banks made up $23 billion of the divested investments but those decreases were offset by increases elsewhere, according to the story.

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