LONDON/FRANKFURT (Dec 8): European banks, struggling to tap capital in fickle interbank markets, face further pressure on their short-term funding as sovereign downgrades and economic chills drive them onto the blacklists of money market fund managers.
The reluctance of money funds to buy bank bonds is contributing to pressure on the European Central Bank to extend its liquidity relief programmes to include 2 and even 3 year paper to ease access to money for some lenders.
But with little sign of cash funds returning to the market for the banks and sovereigns they have deserted, the ECB may have to play a much bigger, long-term role in keeping some blacklisted names afloat, experts said.
"Confidence within the banking system has disappeared, reappeared and then disappeared again. This is the role of the central banks, to make sure that all banks who need liquidity can have access to liquidity," Patrick Zweifel, chief economist at Pictet Asset Management said.
"Usually they would only act on the money market between 1 and 7 days. It was rare to see central banks intervene at 28 day maturities but these are now almost seen as conventional measures," he said.
It has never been a more stressful time to run a money market fund, say the managers who rely on healthy trading of high-quality, ultra-liquid bonds to provide clients with an efficient and safe alternative to conventional bank accounts.
In doing so, these funds supply banks with a substantial portion of their short-term funding, a source that has become crucial to institutions struggling to access the capital they need from interbank lending markets.
But with some euro zone sovereign ratings lurching from "risk-free" to "roulette", managers say counterparty risk fears are killing off appetite to hold paper issued by the region's elite banks, as well as its indebted minnows.
U.S. ratings agency Standard & Poor's put the euro zone's remaining six AAA-rated governments on watch for a possible downgrade on Monday, just days after inflicting a two-notch downgrade on Rabobank, the region's last remaining AAA lender.
On Wednesday the same agency also put the AAA rating of the 27-nation European Union on credit watch and said it would cut ratings of a slew of banks if a mass downgrade of euro zone countries materialised.
As the number of AAA ratings falls, so does the number of entities most cash managers are allowed to lend to, potentially diverting up to 450 billion euros managed by members of the Institutional Money Market Funds Association away from euro zone banks and governments.
"Quite often I say to my clients that we have gone pretty well as far as we can in terms of lending to banks. The scale of this (crisis) is so big it is quite difficult to make reasonably sensible decisions on it," Tom Meade, a director at Royal London Cash Management, told Reuters.
Even banks identified as Systemically Important Financial Institutions (SIFIs) are being bypassed by some managers.
"Without collateral, we hand out only to a few SIFIs and most of the Nordic banks at the moment," said Stefan Kreuzkamp, Head of Fixed Income Europe at DWS, a subsidiary of DB Asset Management, which runs around 200 billion euros in assets.
TURNING TO ASIA
Kreuzkamp said money market funds had already slashed exposure to banks in peripheral euro zone countries and were now reducing lending to big bank names unless they provided additional security against their paper.
The moves follow warnings from Federal Reserve official Jeffrey Lacker, who in November admitted he was worried about money market funds and their "ability to weather major problems at European institutions."
Uncertainty about the outcome of the two-year old euro zone debt crisis, and worries about the possible break-up of the 17-nation currency bloc, are prompting fund firms across the region to review counterparty risk, the Reuters Investment Outlook Summit heard this week.
Jennifer Gillespie, head of money markets at Legal & General Investment Management, one of Europe's biggest liquidity fund managers, told Reuters her team was increasingly "nervous about buying anything," including SIFIs.
"We have lost some of the Danish names, Spain is gone, Portugal is gone, Ireland has been gone for a long time, Italy has gone, there's only one institution we are willing to buy in Belgium and we are taking a serious look at Austria," she said.
"We are still buying France, but we have brought in our geographic limits there to well under what we would buy for the likes of UK or Canada."
To replace abandoned euro zone sovereigns and their financial institutions, Gillespie's fund is turning increasingly towards Asia, with Singapore, China, Australia, Korea, and the Middle East seen more appealing than Spain or Italy.
But every day seems to bring fresh doubts about the security of assets she once identified as her staple investments.
"We are probably doing a couple of hours a day now, literally sitting down with people, assessing our high risk and our low risk and it seems that just when we feel we've got somewhere, something else happens," Gillespie said.
"We're trying to get ahead (of the ratings agencies). We do not want to be a forced seller of assets in an illiquid market at a really quiet time ... telling a client we've lost 5 percent of their cash fund is not an option." - Reuters
The reluctance of money funds to buy bank bonds is contributing to pressure on the European Central Bank to extend its liquidity relief programmes to include 2 and even 3 year paper to ease access to money for some lenders.
But with little sign of cash funds returning to the market for the banks and sovereigns they have deserted, the ECB may have to play a much bigger, long-term role in keeping some blacklisted names afloat, experts said.
"Confidence within the banking system has disappeared, reappeared and then disappeared again. This is the role of the central banks, to make sure that all banks who need liquidity can have access to liquidity," Patrick Zweifel, chief economist at Pictet Asset Management said.
"Usually they would only act on the money market between 1 and 7 days. It was rare to see central banks intervene at 28 day maturities but these are now almost seen as conventional measures," he said.
It has never been a more stressful time to run a money market fund, say the managers who rely on healthy trading of high-quality, ultra-liquid bonds to provide clients with an efficient and safe alternative to conventional bank accounts.
In doing so, these funds supply banks with a substantial portion of their short-term funding, a source that has become crucial to institutions struggling to access the capital they need from interbank lending markets.
But with some euro zone sovereign ratings lurching from "risk-free" to "roulette", managers say counterparty risk fears are killing off appetite to hold paper issued by the region's elite banks, as well as its indebted minnows.
U.S. ratings agency Standard & Poor's put the euro zone's remaining six AAA-rated governments on watch for a possible downgrade on Monday, just days after inflicting a two-notch downgrade on Rabobank, the region's last remaining AAA lender.
On Wednesday the same agency also put the AAA rating of the 27-nation European Union on credit watch and said it would cut ratings of a slew of banks if a mass downgrade of euro zone countries materialised.
As the number of AAA ratings falls, so does the number of entities most cash managers are allowed to lend to, potentially diverting up to 450 billion euros managed by members of the Institutional Money Market Funds Association away from euro zone banks and governments.
"Quite often I say to my clients that we have gone pretty well as far as we can in terms of lending to banks. The scale of this (crisis) is so big it is quite difficult to make reasonably sensible decisions on it," Tom Meade, a director at Royal London Cash Management, told Reuters.
Even banks identified as Systemically Important Financial Institutions (SIFIs) are being bypassed by some managers.
"Without collateral, we hand out only to a few SIFIs and most of the Nordic banks at the moment," said Stefan Kreuzkamp, Head of Fixed Income Europe at DWS, a subsidiary of DB Asset Management, which runs around 200 billion euros in assets.
TURNING TO ASIA
Kreuzkamp said money market funds had already slashed exposure to banks in peripheral euro zone countries and were now reducing lending to big bank names unless they provided additional security against their paper.
The moves follow warnings from Federal Reserve official Jeffrey Lacker, who in November admitted he was worried about money market funds and their "ability to weather major problems at European institutions."
Uncertainty about the outcome of the two-year old euro zone debt crisis, and worries about the possible break-up of the 17-nation currency bloc, are prompting fund firms across the region to review counterparty risk, the Reuters Investment Outlook Summit heard this week.
Jennifer Gillespie, head of money markets at Legal & General Investment Management, one of Europe's biggest liquidity fund managers, told Reuters her team was increasingly "nervous about buying anything," including SIFIs.
"We have lost some of the Danish names, Spain is gone, Portugal is gone, Ireland has been gone for a long time, Italy has gone, there's only one institution we are willing to buy in Belgium and we are taking a serious look at Austria," she said.
"We are still buying France, but we have brought in our geographic limits there to well under what we would buy for the likes of UK or Canada."
To replace abandoned euro zone sovereigns and their financial institutions, Gillespie's fund is turning increasingly towards Asia, with Singapore, China, Australia, Korea, and the Middle East seen more appealing than Spain or Italy.
But every day seems to bring fresh doubts about the security of assets she once identified as her staple investments.
"We are probably doing a couple of hours a day now, literally sitting down with people, assessing our high risk and our low risk and it seems that just when we feel we've got somewhere, something else happens," Gillespie said.
"We're trying to get ahead (of the ratings agencies). We do not want to be a forced seller of assets in an illiquid market at a really quiet time ... telling a client we've lost 5 percent of their cash fund is not an option." - Reuters
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