(BN) Money Funds in U.S. Reduced Lending to France’s Banks by 44% in September

This is not sustainable. Nor do I see how the current recapitalization plan for Greece helps us avoid these scenarios in the future. Unless they are going to restructure all of the weak EZ countries along with the banks it will be a race between fiscal consolidation and then next Euro-sovereign insolvency/banking crisis.

U.S. Money Funds Cut Loans to French Banks by 44% Last Month

Oct. 14 (Bloomberg) — The eight largest U.S. money-market funds reduced their lending to French banks by 44 percent last month as the European sovereign debt crisis worsened.

Holdings in BNP Paribas SA, Societe Generale SA, Natixis SA and Credit Agricole SA dropped to $23.2 billion at the end of September from $41.5 billion the previous month, according to filings compiled by Bloomberg and published in today’s Bloomberg Risk newsletter. The biggest falls were for Natixis, at 74 percent, and Credit Agricole, at 64 percent, the data showed.

The funds, which control $592.4 billion in assets between them, disclose their holdings every month. They are reducing loans to European banks on concern the sovereign-debt crisis has undermined lenders’ ability to access wholesale markets. EU banks are increasingly tapping the European Central Bank for emergency cash as short-term funding evaporates. The ECB last week reintroduced yearlong loans, giving banks unlimited access to cash through January 2013.

“There has been a substantial decrease in access to the wholesale funding markets whether for money market funds, debt security issuance or securitization,” Huw van Steenis, an analyst at Morgan Stanley in London, wrote in an Oct. 10 report. “Banks expect that funding markets will continue to deteriorate albeit at a slower pace.”

The reduction in U.S. money-market lending forced the ECB last month to reintroduce dollar funding through longer-term three-month repurchase agreements. The central bank said Oct. 12 that six lenders asked for a total of $1.35 billion of three- month dollar loans in the first of three operations. The banks will pay a fixed rate of 1.09 percent for the funds. Separately, one bank received a $500 million week-long dollar loan.

Global Recession

The ECB last introduced a three-month dollar loan in May 2010 to calm markets roiled by the threat of a Greek default. It has been lending banks as much euro cash as they need at its benchmark rate since October 2008, when the collapse of Lehman Brothers Holdings Inc. triggered a global recession.

The funds’ holdings in Societe Generale declined by 51 percent to $3 billion, and BNP Paribas by 20 percent to $14.8 billion, the filings show. Over the last 12 months, there has been an 83 percent decline in Societe Generale funding from U.S. money market funds and a 40 percent fall in funding for BNP Paribas. Spokesmen for Paris-based Societe Generale, BNP Paribas and Credit Agricole declined to comment on the reduction. Officials at Natixis didn’t return calls for comment.

“Even if it were to go to zero, there would be no problem,” Frederic Oudea, Societe Generale’s chief executive officer, said in a Sept. 13 interview. The bank could withstand an indefinite withdrawal of U.S. money market funding, he said.

Dollar Liabilities

European banks, including BNP Paribas and Societe Generale, have said they have reduced their reliance on U.S. money market funding. They are also increasingly using other sources of dollar funding to finance their U.S. operations.

The premium European banks pay to swap euro funding for dollar liabilities rose to within 4 basis points of the highest level since December 2008 earlier this month.

The funds also reduced their holdings in KBC Groep NV, Belgium’s biggest lender, by 80 percent to $587 million. KBC spokesman Stephane Leunens declined to respond to a request for comment.

The money market data are based on the most recent portfolio disclosures from Fidelity Cash Reserves Fund, JPMorgan Prime Money Market Fund, Vanguard Prime Money Market Find, Fidelity Institutional Money Market Portfolio, Fidelity Institutional Prime Money Market Portfolio, BlackRock TempFund, Wells Fargo Advantage Heritage Money Markets Fund and Federated Prime Obligations Fund. The figures include repo loans that are backed by government collateral.

‘Carefully Selected’

Federated Investors Inc. said that its funds would continue to invest in European banks. The use of “carefully selected” securities from major global European banks poses a “minimal credit risk,” said Meghan McAndrew, spokeswoman at Pittsburgh- based Federated Investors.

JPMorgan declined to comment. Fidelity Investments, Vanguard, BlackRock and Wells Fargo didn’t return requests for comment.

The funds’ assets dropped 1.7 percent in the month. U.S. money funds held $2.61 trillion in assets as of Oct. 11, including $1.45 trillion in funds eligible to invest in non- government debt, according to research firm iMoneyNet in Westborough, Massachusetts.

To contact the reporters on this story: Radi Khasawneh in Londont .

To contact the editors responsible for this story: Edward Evans at eevans3 Ted Merz in New York at tmerz

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