12 June 2012
Last updated at 08:28 ET
But a spokesman for First Minister Alex Salmond said the policy had now simply been "defined".
Scottish Finance Secretary John Swinney laid out his position during a speech in Glasgow on Monday evening.
He underlined a plan to keep a "sterling zone" and the UK regulatory framework, if the Scottish electorate voted for independence in the referendum, expected to take place in autumn 2014.
Addressing a business audience, Mr Swinney said a sterling zone would provide businesses in Scotland and the rest of the UK with the "certainty and stability for trade, investment and growth".
He added: "As the Bank of England takes on the role of regulator for UK financial services - a very sensible and long overdue position - retaining the pound will preserve the highly integrated UK financial services market.
"That framework is solid and substantial and I know that understanding our proposal is important to many of you in making your decisions about Scotland's future."
Labour said the SNP had previously talked about an independent Scotland having its own financial watchdog and had pledged "light-touch regulation".
Scottish Labour leader Johann Lamont, said: "The SNP are making this up as they go along.
"The bank regulators they blamed for the collapse of the banking system are now the people they want to be in charge of the banking system. They reject the UK but want to keep George Osborne in charge of the banks?
"The truth is they know the people of Scotland reject leaving the UK, so they are now performing contortions on policy to make leaving the UK seem like remaining in it."
When asked what the point of independence would be if the SNP favoured keeping the pound and subscribe to London-based financial regulation, the spokesman for Mr Salmond said there was a "fundamental distinction" between monetary policy and fiscal policy.
He explained: "What fiscal policy provides you with is the levers of economic power in order to boost economic growth and increase employment in Scotland.
"No Westminster government has control over interest rates and has not done so since 1997, so, in that sense, it would be exactly the same as for successive Westminster governments."
The spokesman said independence would provide Scotland with a "strong voice" in Europe, adding: "Independence is the only constitutional policy which can ensure that we have the ability to remove trident nuclear weapons from the river Clyde - devo max doesn't provide that power.
He said: "It's not obvious quite how a system with two separate finance ministries and one central bank would work.
"Supposing the Bank of England looked again at a Scottish bank and said, 'it's really in trouble, people would want it to be rescued, but we're not going to rescue it unless we're indemnified', where would they look for that indemnity?
"It wouldn't be the UK Treasury, presumably the English Treasury - it would have to be the Scottish Treasury.
"I don't quite know how you can be a servant of two masters, in terms of two separate treasuries and one central bank. I can't think of an analogy where that's the case."
The Scottish government said it supported a key recommendation of the Vickers report into banking reform to remove the taxpayer from having to bail out troubled institutions in future.
Responding to Sir Howard's point, Scotland's deputy first minister, Nicola Sturgeon, said in the event of a Scottish bailout being needed: "The Scottish government, in that scenario, would pay the Bank of England to provide lender of last resort facilities for Scottish banks.
"The Scottish government has made clear, the SNP's made clear, that an independent Scotland would remain within sterling."
A Treasury spokesman said the Scottish government's proposals remained "totally unclear".
The spokesman said: "If they are proposing a full monetary union with Sterling, then the Eurozone crisis shows that strong control of monetary policy, fiscal policy and borrowing would have to be agreed with the UK government and exercised centrally.
"This includes the role of the Bank of England and the conduct of macro-prudential regulation.
"If they are proposing an independent Scotland using the pound but without a formal monetary union, the presumption is that the Bank of England would not be required to act as lender of last resort or take account of the Scottish economy when setting monetary policy."
The Scottish government has denied performing a policy U-turn by asking UK regulators to oversee Scots banks in an independent Scotland.
The opposition said the move came following the SNP's previous criticism of UK industry controls on Scotland.But a spokesman for First Minister Alex Salmond said the policy had now simply been "defined".
Scottish Finance Secretary John Swinney laid out his position during a speech in Glasgow on Monday evening.
He underlined a plan to keep a "sterling zone" and the UK regulatory framework, if the Scottish electorate voted for independence in the referendum, expected to take place in autumn 2014.
Addressing a business audience, Mr Swinney said a sterling zone would provide businesses in Scotland and the rest of the UK with the "certainty and stability for trade, investment and growth".
He added: "As the Bank of England takes on the role of regulator for UK financial services - a very sensible and long overdue position - retaining the pound will preserve the highly integrated UK financial services market.
"That framework is solid and substantial and I know that understanding our proposal is important to many of you in making your decisions about Scotland's future."
Continue reading the main story
This is difficult stuff for SNP ministers.
Their rhetoric about the financial crisis has been about failed regulation from London being more significant than the failings of bankers in Scotland.
And even if John Swinney thinks the coalition government's reforms are welcome, it still looks like regulation from London.
And from London, it looks a bit presumptions that a Scottish government can assume the protection of institutions based in London.
But the nationalist view is that the Bank of England, being a central bank for the whole of the United Kingdom, is not the creature of Whitehall or of the rest of the UK, but of Scotland as well.
Likewise, the pound sterling is "as much Scotland's currency as it is the currency of England and Wales".
This is difficult stuff for SNP ministers.
Their rhetoric about the financial crisis has been about failed regulation from London being more significant than the failings of bankers in Scotland.
And even if John Swinney thinks the coalition government's reforms are welcome, it still looks like regulation from London.
And from London, it looks a bit presumptions that a Scottish government can assume the protection of institutions based in London.
But the nationalist view is that the Bank of England, being a central bank for the whole of the United Kingdom, is not the creature of Whitehall or of the rest of the UK, but of Scotland as well.
Likewise, the pound sterling is "as much Scotland's currency as it is the currency of England and Wales".
SNP policy favours an independent Scotland joining the Euro, pending a referendum, but the current economic conditions means the option is not currently attractive.
Ministers also said the Bank of England would continue to oversee monetary policy and set interest rates, but an independent Scotland could have a seat on its Monetary Policy Committee, or have a role in appointments.Labour said the SNP had previously talked about an independent Scotland having its own financial watchdog and had pledged "light-touch regulation".
Scottish Labour leader Johann Lamont, said: "The SNP are making this up as they go along.
"The bank regulators they blamed for the collapse of the banking system are now the people they want to be in charge of the banking system. They reject the UK but want to keep George Osborne in charge of the banks?
"The truth is they know the people of Scotland reject leaving the UK, so they are now performing contortions on policy to make leaving the UK seem like remaining in it."
When asked what the point of independence would be if the SNP favoured keeping the pound and subscribe to London-based financial regulation, the spokesman for Mr Salmond said there was a "fundamental distinction" between monetary policy and fiscal policy.
He explained: "What fiscal policy provides you with is the levers of economic power in order to boost economic growth and increase employment in Scotland.
"No Westminster government has control over interest rates and has not done so since 1997, so, in that sense, it would be exactly the same as for successive Westminster governments."
The spokesman said independence would provide Scotland with a "strong voice" in Europe, adding: "Independence is the only constitutional policy which can ensure that we have the ability to remove trident nuclear weapons from the river Clyde - devo max doesn't provide that power.
Continue reading the main story
“Start Quote
End Quote Sir Howard DaviesI don't quite know how you can be a servant of two masters, in terms of two separate treasuries and one central bank”
"Independence is the only constitutional option which can ensure that Scotland decides which military activities we are involved in in order that never again can Scotland be dragged into an illegal war such as Iraq."
The comments came as Sir Howard Davies, a former head of the Financial Services Authority, told BBC Radio's Good Morning Scotland programme that the SNP position to keep a central Bank of England and the pound was unclear.He said: "It's not obvious quite how a system with two separate finance ministries and one central bank would work.
"Supposing the Bank of England looked again at a Scottish bank and said, 'it's really in trouble, people would want it to be rescued, but we're not going to rescue it unless we're indemnified', where would they look for that indemnity?
"It wouldn't be the UK Treasury, presumably the English Treasury - it would have to be the Scottish Treasury.
"I don't quite know how you can be a servant of two masters, in terms of two separate treasuries and one central bank. I can't think of an analogy where that's the case."
The Scottish government said it supported a key recommendation of the Vickers report into banking reform to remove the taxpayer from having to bail out troubled institutions in future.
Responding to Sir Howard's point, Scotland's deputy first minister, Nicola Sturgeon, said in the event of a Scottish bailout being needed: "The Scottish government, in that scenario, would pay the Bank of England to provide lender of last resort facilities for Scottish banks.
"The Scottish government has made clear, the SNP's made clear, that an independent Scotland would remain within sterling."
A Treasury spokesman said the Scottish government's proposals remained "totally unclear".
The spokesman said: "If they are proposing a full monetary union with Sterling, then the Eurozone crisis shows that strong control of monetary policy, fiscal policy and borrowing would have to be agreed with the UK government and exercised centrally.
"This includes the role of the Bank of England and the conduct of macro-prudential regulation.
"If they are proposing an independent Scotland using the pound but without a formal monetary union, the presumption is that the Bank of England would not be required to act as lender of last resort or take account of the Scottish economy when setting monetary policy."
EU 'could limit withdrawals from cash machines' if Greek exit tips eurozone into deeper crisis - Daily Mail
- Border checks and capital controls also being considered
- Athens elections taking place on Sunday with result 50/50
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European Union officials have discussed measures to stop mass withdrawals from cash machines, a report claimed today, if a Greek exit were to tip the eurozone into a deeper crisis.
Finance officials have also discussed imposing border checks and introducing eurozone capital controls, in order to check a possible flight of funds, according to Reuters news agency.
The officials stressed they did not expect Greece to leave the euro and the ideas were from a range of contingency plans - but the preparations indicate the gravity which EU leaders are attaching to a potential Greek exit.
Fragile: Any strong indication that Greece was about to leave the euro would see a run on bank deposits
James Hickman, managing director of Caxton FX, the contingency plan in case Greece drops out of the single currency is 'hardly surprising'.
THE 'JOG' ON SPANISH AND GREEK BANKS
While scenes of a Northern-Rock style run with savers queuing outside branches to pull out cash have not emerged, both Spain and Greece have reported substantial increases in money being pulled out of banks - in what has been called a 'bank jog'.
European Central Bank figures show Greek deposits down by 17 per cent in the year to the end of March 2012, and in the ten days after the 6 May election, savers were reported to have pulled 3bn out of Greek banks.
Meanwhile, figures published by Spain’s central bank showed €97bn was pulled out of the country in the first three months of the year – around a 10th of the country’s GDP.
The slow motion flight of deposits has come as savers and firms worry about not just banks' safety but also their countries’ continuing membership of the euro.
Greek depositors fearing a Greek exit from the euro – which would see citizens rushing to get hold of their euro deposits - have been pulling billions of euros out of the nation’s banks.
Both private individuals and businesses have been transferring funds to places they believe are safer - such as German banks or the London property market.
Routes such as transferring assets to subsidiaries or private banks elsewhere are being used to move large amounts of money by international companies and the wealthy.
These methods are not open to ordinary citizens, but Greeks have been reported to be pulling out cash and stashing it away in case the currency falls out of the euro and returns to the drachma.
Many are also transferring any spare cash held in savings abroad to relatives or friends and asking them to hold on to it. One Greek living in London told This is Money that many of his compatriots have been regularly moving any money they can out of the country for some time.
European Central Bank figures show Greek deposits down by 17 per cent in the year to the end of March 2012, and in the ten days after the 6 May election, savers were reported to have pulled 3bn out of Greek banks.
Meanwhile, figures published by Spain’s central bank showed €97bn was pulled out of the country in the first three months of the year – around a 10th of the country’s GDP.
The slow motion flight of deposits has come as savers and firms worry about not just banks' safety but also their countries’ continuing membership of the euro.
Greek depositors fearing a Greek exit from the euro – which would see citizens rushing to get hold of their euro deposits - have been pulling billions of euros out of the nation’s banks.
Both private individuals and businesses have been transferring funds to places they believe are safer - such as German banks or the London property market.
Routes such as transferring assets to subsidiaries or private banks elsewhere are being used to move large amounts of money by international companies and the wealthy.
These methods are not open to ordinary citizens, but Greeks have been reported to be pulling out cash and stashing it away in case the currency falls out of the euro and returns to the drachma.
Many are also transferring any spare cash held in savings abroad to relatives or friends and asking them to hold on to it. One Greek living in London told This is Money that many of his compatriots have been regularly moving any money they can out of the country for some time.
Stock markets across Europe were steady today after yesterday's rollercoaster ride in the wake of Spain obtaining 80billion from the EU to shore up its banking system.
But Spanish and Italian 10-year government bond yields were trading at 6.59 and 6.01 per cent respectively, as investors worried how Spain's debts would be repaid. That is worryingly close to the 7 per cent level widely seen as unsustainable, and which triggered bailouts in Greece, Ireland and Portugal.
'Despite Spain's banks being better off to the tune of €100billion, yields on Spanish government debt have surged above the danger level as traders interpret this as an escalation of the debt crisis and not as a preventative measure that policy makers had tried to spin things,' said Jonathan Sudaria, a dealer at London Capital Group.
Italy, as well as Cyprus, came into the eurozone firing line last night after the Spanish bailout failed to inspire a lasting boost for markets. Early euphoria evaporated as investors fretted about the details of a Spanish rescue and which country would be next to need support.
Kathleen Brooks, an analyst at Forex.com, said: 'Throughout this crisis Europe’s periphery has been personified as a pack of dominos – if one falls then others will follow. So now the attention turns to the next domino.'
Cyprus, which is heavily exposed to Greece, hinted that it may need a bailout by the end of the month – both for its banks and the country as a whole.
'The issue is urgent,' said finance minister Vassos Shiarly. 'We know the recapitalisation of the banks must be completed by June 30 and there are only a few days left.'
It is feared that Cyprus may be followed by Italy and the country’s borrowing costs soared as the crisis threatened to spread to Rome.
Official figures in Italy showed the economy shrank 0.8 per cent in the first three months of the 2012 – the sharpest decline for three years.
The terms of the Spanish bailout – widely seen as less onerous than for other countries – could also trigger demands for earlier rescues to be renegotiated.
It has stoked popular anger in Greece, where the radical-left coalition, SYRIZA, may win the second election, increasing the risk that Greece could renege on its EU/IMF bailout and therefore move closer to abandoning the euro.
The EU source told Reuters that the Eurogroup Working Group - which consists of eurozone deputy finance ministers and heads of treasury departments - has also discussed the possibility of suspending the
Schengen agreement, which allows for visa-free travel among 26 European countries, with the aim of limiting a bank run or capital flight.
'Contingency planning is underway for a scenario under which Greece leaves,' one of the sources, which Reuters said has been involved in conference calls on the plans, said. 'Limited cash withdrawals from ATMs and limited movement of capital have been considered and analysed.'
Another source confirmed the discussions, including that the suspension of Schengen was among the options raised.
'These are not political discussions, these are discussions among finance experts who need to be prepared for any eventuality,' the second source said. 'It is sensible planning, that is all, planning for the worst-case scenario.'
The first official said it was still being examined whether there was a legal basis for such extreme measures.
'The Bank of Greece is not aware of any such plans,' a central bank spokesman in Athens told Reuters when asked about the sources' comments.
Short lived: Early euphoria on the London stock market yesterday soon evaporated
Italy Bailout May Be Necessary, Austrian Finance Minister Says - Huffington Post
* Fekter says Rome's high borrowing costs may drive it to aid
* Italy's Monti calls comments "totally inappropriate"
* Spanish, Italian bond yields rise on market worries
* EU, ECB press for early euro zone banking union
By Michael Shields and Steve Scherer
VIENNA/ROME June 12 (Reuters) - Raising the stakes in Europe's debt crisis, Austria's finance minister said Italy may need a financial rescue because of its high borrowing costs, drawing a furious rebuke on Tuesday from the Italian prime minister.
Maria Fekter's assessment of the euro zone's third largest economy amplified investors' fears that Europe is far from ending 2-1/2 years of turmoil.
A deal by euro zone finance ministers on Saturday to lend Spain up to 100 billion euros ($125 billion) to recapitalise its banks was seen by many in the markets as yet another sticking plaster.
Euro zone rescue funds, already stretched by supporting Greece, Portugal, Ireland and soon Spain, might be insufficient to cope with Italy as well, Fekter said in a television interview on Monday night.
"Italy has to work its way out of its economic dilemma of very high deficits and debt, but of course it may be that, given the high rates Italy pays to refinance on markets, they too will need support," Fekter said.
She sought to soften her remarks on Tuesday, saying she had no indication Italy planned to apply for aid.
Italian Prime Minister Mario Monti said her remarks were "completely inappropriate" for an EU finance minister, and euro zone officials said they were deeply unhelpful.
Amid the cacophony, Italian and Spanish government 10-year bond yields rose further above 6 percent as the aid deal for Spanish banks failed to ease fears about Madrid's ability to fund itself.
The market reaction suggests that ministers have failed to break the so-called doom loop between rising government debt, economic recession and teetering banks that previously drove Greece, Ireland and Portugal into EU/IMF bailouts.
Analysts cited uncertainty about the mechanics of the Spanish rescue and fears that private bondholders could be pushed down the repayment chain below official lenders, risking losses in any debt write-down, as they suffered in Greece.
"Is this the next stage of a slippery slope in subordinating existing government bondholders?" asked Deutsche Bank strategist Jim Reid in a note to clients.
Investors are also worried about the outcome of a Greek general election next Sunday which may determine whether the country stays in the euro zone.
Credit ratings agency Fitch said the bank rescue may help stabilise Spain's sovereign rating, which it cut last week by three notches to BBB, and the bailout should not have a direct impact on other euro zone countries.
Even though Italy's deficit and unemployment are lower than Spain's and its banks are not exposed to a real estate crisis, doubts about Rome's ability to turn itself around during a deep recession are keeping international investors at bay.
If the economy does not start to grow after a decade of stagnation, it will face mounting difficulty in bringing down its debt, now at 120 percent of gross domestic product - second only to Greece's debt mountain in the euro zone.
Bank of Italy Governor Ignazio Visco said last week Italy's emergency is not over and pressed Monti to speed up reforms.
BANKING UNION
European Commission President Jose Manuel Barroso, European Central Bank policymaker Christian Noyer and French Finance Minister Pierre Moscovici all called on Tuesday for swift moves to create a euro zone banking union.
Barroso told the Financial Times that a cross-border banking supervisor, a deposit guarantee scheme and a bank resolution fund could be put in place in 2013 without changing EU treaties. EU paymaster Germany has so far rejected a deposit guarantee or a resolution fund, saying they would require treaty change.
The Bundesbank weighed in, saying a European banking union could bring advantages only if properly anchored in a fiscal union with powers to stop countries breaking budgetary rules.
Fekter's typically outspoken comments came after Italy's industry minister dismissed the idea that Rome may need external help, saying reforms adopted by his government so far had put the Italian economy on a sound footing.
Her concerns are shared by one of the German government's council of economic advisers, Lars Feld, who told Reuters that Italy could be next in line.
"Overcoming the troubles in Spain will bring calm to the markets for a while, but the chances are not so small that Italy may also come under fire, in particular as the promised labour market reform has turned out to be less ambitious," Feld said.
OUTSPOKEN
The Austrian minister has a track record of speaking out of turn or undiplomatically. She angered EU paymaster Germany last month by suggesting Greece might be forced out of the European Union over its economic problems.
She infuriated Eurogroup chairman Jean-Claude Juncker in March by rushing out to brief the media on a deal to increase the euro zone's financial firewall before he could make the official announcement. She later apologised.
And when U.S. Treasury Secretary Timothy Geithner was invited to a euro zone finance ministers' meeting in Poland last year to plead for a more robust rescue fund, Fekter said bluntly that Washington should look after its own worse fiscal mess first.
In Brussels, EU officials privately voiced exasperation at her latest comments on Italy.
"The problem is that this is market sensitive," said a euro zone official, whose position does not authorise him to speak on the record. "It's one thing if journalists write this but quite another if a euro zone minister says it. Verbal discipline is very important but she doesn't seem to get that."
Italy's leading economic newspaper, Il Sole 24 Ore, appealed to Germany to save the single currency before it is too late.
"Schnell Frau Merkel! (Hurry Up Mrs Merkel!)," the usually sober business daily said in a banner headline in German.
An editorial urged Chancellor Angela Merkel to back guarantees for European bank deposits, allow direct access for banks to euro zone rescue funds and accept a mutualisation of European public debts, with each country paying a different interest rates.
Merkel has opposed issuing joint euro zone bonds and says member states must agree to transfer more budget sovereignty to European institutions, including the EU's Court of Justice, as part of a political union before she would consider such idea.
An opinion poll published on Tuesday showed Italian confidence in the euro had plunged by 16 percentage points in two weeks as Spain's banking crisis and the looming Greek election test the single currency.
Debt crisis: Cyprus 'asks for €5bn from Russia' - Daily Telegraph
The island’s second-biggest lender, the Cyprus Popular Bank, needs €1.8bn to meet regulatory requirements before the end of the month. The figure is equivalent to about 10pc of Cyprus’s GDP.
The exposure of Cyprus’s banks to Greece is about €23bn, bigger than the size of the Cypriot economy, at around €17.3bn.
In addition to being hit by the turmoil in Greece, the island has also been badly affected by an explosion last year which put a key power plant out of action.
A potential bail–out of Cyprus’s banks comes as the country prepares to accept the rotating EU presidency for the next six months, taking over on July 1.
Cyprus has implied that any help from EU partners would focus on the banking sector, as in Spain.
The exposure of Cyprus’s banks to Greece is about €23bn, bigger than the size of the Cypriot economy, at around €17.3bn.
In addition to being hit by the turmoil in Greece, the island has also been badly affected by an explosion last year which put a key power plant out of action.
A potential bail–out of Cyprus’s banks comes as the country prepares to accept the rotating EU presidency for the next six months, taking over on July 1.
Cyprus has implied that any help from EU partners would focus on the banking sector, as in Spain.
EU: movement of money, people can be limited - The Guardian
BRUSSELS (AP) — The European Commission has been providing legal advice to others who are considering possible scenarios should Greece leave the euro, a European Union spokesman said.
Olivier Bailly said Tuesday that, legally, limits could be imposed on movement of people and money across national borders within the EU if it's necessary to protect public order or public security — but not on economic grounds.
"Some people are working on scenarios," he said, but refused to confirm or identify which organizations and people were working on them.
Olivier Bailly said Tuesday that, legally, limits could be imposed on movement of people and money across national borders within the EU if it's necessary to protect public order or public security — but not on economic grounds.
"Some people are working on scenarios," he said, but refused to confirm or identify which organizations and people were working on them.
How does M&S Bank stack up against its rivals? - Daily Telegraph
M&S Bank pledges to be open "twice as long" as other high street banks, matching its retail stores opening times, and even opening on Sundays. Customers will be able to access 24 hour online banking, and call centres will be UK based.
Study reveals more money may not make you happier - money.aol.co.uk
PAFar from rejoicing when they get a pay rise, those on high salaries who are neurotic can easily view a raise as a failure. Neurotic people tend to enjoy income less if they are richer, the findings show. They chime with other studies that show wealth doesn't necessarily bring happiness.
In a working paper, economist Dr Eugenio Proto, from the Centre for Competitive Advantage in the Global Economy at the University of Warwick, looked at how personality traits can affect the way we feel about our income in terms of levels of life satisfaction.
He found evidence suggesting that neurotic people can view a pay rise or an increase in income as a failure if it is not as much as they expected.
Neuroticism is a tendency to experience negative emotional states. People with high levels of neuroticism have higher sensitivity to anger, hostility, or depression.
Dr Proto, who co-authored the paper with Aldo Rustichini from the University of Minnesota, said people who are on a high salary and have high levels of neuroticism are more likely to see a pay rise as a failure.
He said: "Someone who has high levels of neuroticism will see an income increase as a measure of success. When they are on a lower income, a pay increase does satisfy them because they see that as an achievement. However, if they are already on a higher income they may not think the pay increase is as much as they were expecting. So they see this as a partial failure and it lowers their life satisfaction."
This would explain why some bankers throw their toys out of the pram when they get their bonuses - while mere mortals like us have never had a bonus in their life.
Dr Proto added: "These results suggest that we see money more as a device to measure our successes or failures rather than as a means to achieve more comfort."
An older study showed that while the income per capita in the US between 1974 and 2004 almost doubled, the average level of happiness showed no appreciable trend upwards. This puzzling finding, called the Easterlin Paradox after its author, has been shown to hold also for European countries.
And a more recent UN report, which ranked countries according to levels of happiness, also suggested that money can't buy you happiness. The report identified the key factors to a nation's happiness as "a high degree of social equality, trust and quality of governance". Inequality is generally thought to damage societies. Scandinavian countries Denmark, Finland and Norway came top, while the UK barely scraped the top 20, coming in at number 18 below the United Arab Emirates and just above Venezuela.
U.S. money funds pared euro zone debt in May-JPMorgan - msnbc.com
NEW YORK (Reuters) - U.S. prime money market funds trimmed euro zone bank debt holdings in May on worries over Spain's problem banks and Greece's possible exit from the euro zone, which could deepen the region's debt crisis, a report from JPMorgan Securities released on Tuesday showed.
Meanwhile, money funds' appetite for the short-term debt of investment banks was dampened on fears of ratings downgrades by Moody's Investors Service.Moody's earlier this year said it might cut the credit ratings of many large global banks and securities firms, including major U.S. and European institutions, due to fragile funding conditions.
Prime money market funds lowered their euro zone debt holdings by $7 billion in May, following a $14 billion increase in April.
May's decrease reduced their total exposure to euro zone banks to $199 billion, although it is still up $45 billion since the beginning of the year, according to J.P. Morgan's latest monthly analysis of prime money funds' holdings.
"Despite the concerns brewing in Europe, prime MMFs (money market funds) have not seen large outflows like those they experienced last year as prime MMFs are much less exposed to euro zone banks this time around," JPMorgan analysts wrote.
Unlike Treasuries-only money market funds, prime money funds may invest in riskier short-term bank debt in an attempt to obtain higher yields.
Total prime money funds had $1.41 trillion in assets at the end of May, down $4 billion from April and down $21 billion since the beginning of the year, JPMorgan said. They represented a little more than half of all U.S. money fund assets.
The Netherlands accounted for a large share of the fall in euro zone holdings, as funds cut their Dutch exposure by $5 billion. There were $1 billion falls in their overall exposure to Germany and France last month, JPMorgan analysts said.
As they moved cash out of Europe, prime fund managers stashed the proceeds into perceived safe-haven Canadian, Japanese and U.S. debt, according to the latest analysis.
Their non-European holdings grew $23 billion to $569 billion in May. For the year, they are up $12 billion.
RATINGS REVIEW DECISION
While the euro zone's financial woes have underpinned money funds' preference for low-risk, low-yielding debt, Moody's review of Goldman Sachs, Morgan Stanley and other global investment banks has intensified the risk aversion among fund managers, JPMorgan analysts said.
Traders expect Moody's will announce its decisions on these financial institutions this week as a part of a broad credit review of West European and major global banks.
Global investment banks rely on money funds for short-term loans to finance their trades and daily operations. Funds buy their commercial paper, certificates of deposits, repurchase agreements (repos) and other short-term debt.
The banks borrowed a combined $510 billion from prime funds from repos alone at the end of May, JPMorgan analysts said.
"The larger concern for prime MMFs currently is the ongoing Moody's bank ratings review, particularly those of firms with global capital market operations (GCMIs)," they wrote.
Steep downgrades of GCMIs would hurt the market value on their debt and could force funds to rid of them.
In anticipation of downgrades, prime money funds reduced their repos in which GCMIs pledge non-government securities as collateral by $45 billion in May. In turn, they increased their repos backed by U.S. government and agency securities - which are seen safer - by $68 billion, JPMorgan analysts said.
"The downgrades so far have been less severe than market participants initially thought and this has recently given hope that the downgrades to GCMIs will be less severe than originally anticipated as well," they wrote.
(Editing by Andrea Ricci)
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