Three of the world's biggest financial institutions in the U.S. are closing their European money market funds to new investments after the European Central Bank (ECB) reduced its benchmark rate to a record low of 0.75 percent and slashed deposit rates to zero on Thursday, undermining global investor confidence.
JPMorgan Chase (NYSE: JPM), Goldman Sachs (NYSE: GS) and BlackRock Inc. (NYSE: BLK) are blocking investments in European money market funds -- a cue that the U.S. contagion from the euro debt crisis could be deeper and darker than thought.
The rate cuts would result in losses for investors of euro-dominated money market funds, JPMorgan indicated in a notice to shareholders. JPMorgan, which is one of the world's biggest providers of money-market funds, said it would not welcome cash in five of its euro money market and liquidity funds.
Goldman Sachs is warding off investments in its Euro Government Liquid Reserves Fund while BlackRock Inc., a globally renowned asset management firm, is limiting money in two of its European funds, the Institutional Euro Liquidity Fund and the Institutional Euro Government Liquidity Fund.
The ECB rate cut, besides raising alarm bells about the health of the global economy, will adversely affect yields for investors of money market funds, which largely depend on interest rates to make their money.
With global interest rates near record lows, money market funds have been finding it increasingly difficult to invest client assets in avenues that could promise a decent return. Fund managers have been constrained to reduce fees to keep customer returns above zero -- a move that has driven some funds out of business, leaving many others barely afloat.
Money market funds, which hinge on a stable share value, have historically been among the most stable investments. Money market losses for investors are a sign of a burgeoning crisis, financial experts say.
The European market environment is in unchartered territory with such historically low -- or even negative -- yields for high-quality issuance, Goldman Sachs (GS) said in a memo to fund shareholders, citing the ECB's rate cut. It is not currently feasible for our portfolio managers to deploy capital without substantially diluting the yield for the existing base of shareholders.
Shares of all three companies declined in the wake of the announcement. BlackRock shares declined 0.48 percent in Friday afternoon trading. Goldman Sachs shares fell 0.28 percent and JPMorgan shares plunged 1.37 percent to close at 33.92.