The worsening eurozone debt crisis has prompted Australian banks to be more aggressive in cutting their exposure to the embattled continent.

Collectively, the Australian lenders have pulled out over a billion dollars in funds from Belgium, Spain and France. At the same time, European banks reduced more than $8 billion worth of loans from Australia as the European lenders amid a funding squeeze in their home market.

However, reports from the Bank for International Settlements (BIS) showed that despite the risks of loaning to eurozone members, Australian banks actually hiked their exposure to Italy by more than $700 million in the September quarter amid fears that Europe's third-largest economy would have difficulty repaying its ballooning debts.

The Aussie lenders reduced their exposure to private and public debt in Spain to just $212 million by the end of Q3 2011 from over $1 billion in Q2. For the same period, the Australian banks almost cut their entire exposure to Portugal.

Their exposure to France dipped to $11.6 billion by the end of the September quarter and to Belgium by more than $300 million. Since 2009, Australian banks did not have any direct exposure to Greece, which triggered the continent's sovereign debt crisis that immediately spread to other eurozone members.

Although Australia is not at a big risk even with the threat of another global crisis over the European debt contagion, the BIS figures showed that French banks also reduced by over $4.5 billion their loans to the Australian economy in the September quarter.

The fear in the markets of the repercussion over the worsening European debt crisis is reflected in U.S. money-market funds also drastically reducing their exposure to eurozone banks.

Data from a Fitch Ratings survey said that the funds now hold only 10 per cent of $64 billion of their assets as of the end of December 2011 in eurozone bank debt. It is down from $230 billion or 30 per cent of their $755 billion total at the end of May.

The Fitch survey covered the 10 largest money market funds in the U.S., which holds 45 per cent of total assets under management by American funds.

The money market funds are considered indicators of market distress since it only buy assets with minimal credit risks and sell assets at the first signs of trouble.

Chris Conetta, head of global commercial paper trading at Barclays Capital in New York, said the money market funds expect a gradual increase in exposure to European banks and sovereigns throughout 2012, such a development would be hinged on catastrophic events being avoided. These events include a possible Greek default and more substantial downgrades by ratings agencies.

However, Crane Data President Peter Crane said that while it would not be surprising if money funds returned to Europe, it would likely take time before such a scenario takes place.

Meanwhile, Reserve Bank of New Zealand Governor Allan Bollard said the country's banks are ready to handle the effect of a European sovereign debt crisis.

"A sovereign debt crisis starting among the peripheral euro-economies, and accelerated by the global financial crisis, has blown out with the threat or contagion to larger European economies, affecting funding markets for all countries, including New Zealand," Mr Bollard was quoted by Fox News.

However, he said New Zealand banks have learned several lessons over the past few years which it would apply to the threat of a fallout. These lessons include the effectiveness of various exchange rate interventions from successful ones such as that done by the Swiss and unsuccessful ones such as that by the Japanese.

Mr Bollard added that the New Zealand central banks is alert to the possibility that the next crisis would impact the banking sector in the country in a more systematic way and it has moved to enforce capital requirements under the Basel II framework.

RELATED STORIES