(The following statement was released by the rating agency)
July 16 - Standard & Poor’s Ratings Services said today that the European Central Bank’s interest rate cuts are moving the eurozone’s money market funds into uncharted territory.
The ECB’s rate cuts took effect last week--the benchmark rate dropped to 0.75% from 1% and the deposit facility interest rate went to 0.00% from 0.25%.
“As a result, according to our analysis, money market fund closures have reached EUR79 billion out of a total euro-denominated rated asset pool of EUR133 billion to date,” said Standard & Poor’s credit analyst Andrew Paranthoiene.
The rate cuts have hardened conditions for European money market funds, which have been coping with the prospect of near zero or negative yields for most of 2012. That’s actually been the case for a subset of those funds, the region’s government liquidity funds, which invest in high credit quality “safe haven” government debt.
As a result of the 0.00% deposit rate, Standard & Poor’s believes that there is an increased likelihood that negative yields on individual money market investments in the European Economic and Monetary Union (EMU or eurozone) may accumulate to produce a negative return to money market funds.
“This in turn would increase the likelihood of lower net asset values (NAV) per share for euro-denominated money market funds,” said Mr. Paranthoiene. “Such a development could also be credit-negative for our principal stability fund ratings (PSFR) on these funds.”
If conditions persist or worsen, should the ECB lower rates further in September, investors may decide to redeem their shares, increasing strain on the money market funds.
Or, fund providers may assess the viability of these products. If they decide to close funds, it will further reduce the amount of investment choices available to investors.
The report Standard & Poor’s published today, “CreditFAQ: What Are The Implications Of Negative Yields For European Money Market Funds?” provides answers to frequently asked questions about how the current market conditions may affect Standard & Poor’s ratings on money market funds, our principal stability fund ratings (PSFR):
-- What is a principal stability fund rating?
-- How have European money market asset levels moved over recent years and what is the percentage of eurozone government liquidity fund assets in the mix?
-- Does the closing of the fund to subscriptions affect a PSFR?
-- How does a negative yield impact a PSFR?
-- What are some of the tools still available to money fund managers to lessen the impact of negative yields on NAVs?
-- How would Standard & Poor’s view a rated fund manager’s use of unconventional accounting techniques to maintain a stable NAV?
-- If a fund moves to a variable net asset value (VNAV), do the same NAV thresholds apply?
-- How do current market conditions for euro-denominated money market funds compare to those in the U.S.?