The Financial Times writes "Europe's money market funds future in focus". (See also, FT's "Money market funds look to pass on losses".) It says, "It would be good news for security guards and manufacturers of safe boxes. Rather than paying banks interest on overnight deposits, the European Central Bank would charge them for the privilege. Banks would then withdraw cash from the ECB and stick it in their own vaults. The idea is becoming less ridiculous. In July, the ECB cut its main interest rate -- the price banks pay for its liquidity -- to 0.75 per cent. As a result, the rate on its deposit facility, set 75 basis points lower, is already zero. Logically, further attempts to revive the struggling eurozone economy would see the deposit facility rate turning negative.... But they could threaten the functioning of financial markets and the business model of Europe's money market funds. As Mr Draghi admitted in August, "these are largely uncharted waters".... Bank of America closed its European fund after the ECB's interest rate cut last month. Other European money market fund managers are now talking to clients about how they could pass on negative yields to investors.... Several managers are considering changing prospectuses to allow them to reduce the number of shares in a fund, passing on negative income to investors, without adjusting the net asset value. But despite the record low yields and open discussion of negative returns, Europe's money market funds have been surprisingly resilient to outflows this year, leading some to argue they could even weather negative yields." The FT quotes Fitch's Aymeric Poizot, "As long as there is lots of cash on corporate balance sheets, money market funds will still have customers."
