ECB sub-zero rate threat leaves money funds fearing extinction

By Marc Jones and Jamie McGeever

LONDON, Nov 26 (Reuters) - Europe's money market funds fear the twin threat of being charged to park cash at the European Central Bank and tougher regulation could push them to the brink of extinction.

The industry is worth around 850 billion euros, but the funds, which traditionally buy only top-rated, short-term debt, are finding life increasingly difficult as record low rates leave them struggling to make a profit.

The health of money market funds is also important for the region's governments and banks for which they are a reliable source of funding.

Almost 400 of the 1,555 funds that existed at the start of 2011 have closed, and with the ECB now flagging that its deposit rate could go below zero - effectively charging those who park cash - many of those remaining are fearing for their future.

Though funds do not park money at the ECB themselves, sub-zero rates would hurt because the yields on the government, corporate or bank bonds that make up the bulk of their portfolios are also be likely to become unprofitable.

"It could be the final nail in the coffin for money market funds," said Patrick Simeon a fund manager at money market giant Amundi in Paris.

"The fact we can still get a credit premium on non-government issuers means we still get a slight positive return but if the central bank puts its deposit rate into negative territory we will have no chance of achieving this goal."

ECB data shows euro zone-based money market funds have already suffered 57 billion euros of outflows this year, over 8 percent of their total worth.

Many analysts suspect if there were major closures in the industry, money would simply find another home, though some fear it could kill off a reliable source of funding for euro zone governments and banks at a time when much of the region is still struggling to get back on its feet.

According to Barclays, Europe's money market funds currently hold 22 percent of all short-term securities issued either by governments or corporates in the region and almost 40 percent of all short-term debt issued by EU banks.

SUB ZERO CHILL

A recent Reuters poll showed that money market traders still don't think the ECB will go sub-zero with its deposit rate but some of its policymakers including Board member Joerg Asmussen are clearly warming to the idea. .

Despite the scepticism of some traders, markets are nevertheless starting to position themselves for an ECB move.

There has been a surge in options that would pay out if the ECB does go negative (), while the euro took a temporary dive last week following a report that a -0.1 depo rate was being eyed.