U.S. Firms Build Cash Buffer to European Crisis in Q3

(REUTERS) - U.S. companies sat on their largest pile of cash on record during the third quarter, providing a substantial buffer against any blow that might come from Europe's debt crisis, data from the Federal Reserve showed on Thursday.

Non-financial corporate businesses held $2.12 trillion in liquid assets, such as cash, during the July-September period, up from a revised total of $2.07 trillion in the previous quarter, the data showed.

Companies have steadily increased their cash holdings since the country emerged from the 2007-2009 recession, with firms uncertain about future demand and financial stability.

After getting stung by the U.S. financial crisis that accompanied the recent recession, companies are bracing for a possible worsening of Europe's debt crisis that could make it harder to borrow money.

The notion of 'fool me once shame on you, fool me twice shame on me' is fully reflected in corporate balance sheets, said Jeff Greenberg, an economist at Nomura in New York.

Companies and investors are on edge about whether euro zone policymakers can keep the 17-nation bloc from unraveling.

On Thursday, the European Central Bank cut interest rates and offered banks long-term funds in a new bid to avert a credit crunch, although it doused hopes of dramatic crisis-fighting action in the euro area.

The Fed data, part of its Flow of Funds report, also showed U.S. household debt contracting at a 1.2 percent annual rate in the third quarter, while household wealth fell by $2.45 trillion.

It was the 13th straight month of declines in household credit in the United States, where families are slowly coming to terms with the mountain of debt they accumulated before the last recession.

The pace of deleveraging, however, has slowed this year compared to 2010.

Households have mostly shed mortgage debt taken on during the country's housing bubble. During the third quarter, mortgage debt declined at a 1.8 percent annual rate. Consumer credit, a smaller part of household balance sheets, rose by 1.2 percent during the quarter.

The report also showed a drop in the value of financial assets dragged down household net worth to $57.35 trillion.

Households have struggled to rebuild their net worth after the country's housing bubble popped and triggered the last recession. At the end of 2006, household wealth was $65.17 trillion, the figures show.

(Reporting By Jason Lange; Editing by Andrea Ricci)