There is further evidence that US money market funds continue to reduce their exposure to Europe. Contrary to popular belief the funds are generally not selling paper. Typically they hold commercial paper (short-term loans) to maturity and they are simply not rolling the maturing debt. From the NY Times:
American institutions are pulling back on loans to even the sturdiest banks in Europe. When a $300 million certificate of deposit held by Vanguard’s $114 billion Prime Money Market Fund from Rabobank in the Netherlands came due on Nov. 9, Vanguard decided to let the loan expire and move the money out of Europe. Rabobank enjoys a AAA-credit rating and is considered one of the strongest banks in the world.Rabobank's dollar funding constitutes about 14% of it's overall funding needs (below). However this does demonstrate that even the strongest banks in Europe are having to change their funding strategy.
“There’s a real sensitivity to being in Europe,” said David Glocke, head of money market funds at Vanguard. “When the noise gets loud it’s better to watch from the sidelines rather than stay in the game. Even highly rated banks, such as Rabobank, I’m letting mature.”
So where are these firms going to obtain dollar funding? The stronger banks will obtain it in the interbank market - borrowing from other banks (JPM or HSBC for example). The weaker ones will have to rely on the Fed via the ECB. As discussed earlier the Fed's Liquidity Swap is expected to grow to accommodate this shift.