EU Aides Say Transaction Tax Design Hurts Sovereign Debt
Government bonds should be excluded from the European Union’s planned financial-transaction tax because the levy would drive up sovereign borrowing costs, a panel of European debt-management officials said.
Primary issuance, secondary-market trading, related derivatives and repurchase agreements all affect borrowing costs, which would rise unless transactions involving government debt are exempt, according to an April 18 letter to senior EU finance aides that was obtained by Bloomberg News.
The proposed tax “underestimates the impact of the proposal on market liquidity,” said the two-page analysis signed by Anne Leclercq, director for treasury and capital markets in Belgium’s finance ministry in Brussels. “This impact would substantially reduce the attractiveness of sovereign bonds and jeopardize diversification of the investor base, in particular for those sovereign issuers for which liquidity is at the heart of their strategy.”
The officials’ concern adds to warnings issued by European Central Bank policy makers. ECB Executive Board members Yves Mersch and Benoit Coeure both questioned the tax’s design this month. The ECB’s Bond Market Contact Group said in a May 6 report that the proposal would hurt banks and disrupt markets.
EU Tax Commissioner Algirdas Semeta said the debt managers’ reservations are overblown.
“I think that their findings are exaggerated,” he said today in an interview with Francine Lacqua on Bloomberg Television’s “The Pulse.” The low proposed tax rates, combined with exemptions for primary sales and trades with national debt managers, are sufficient to safeguard markets, he said.
“The scope which was proposed by the commission corresponds to the need to ensure that it is impossible to circumvent the tax,” Semeta said. “We consider that this would be the best solution.”
Semeta aims to create the transaction tax to take effect as soon as next year. The proposed levy could be collected worldwide by France, Germany and nine other EU nations, including Belgium, that have so far signed up, if the effort stays on schedule.
The EU is trying to remedy what it sees as a “patchwork” of levies and rein in speculative trading. The plan would charge a 0.1 percent rate for stock and bond trades and 0.01 percent for derivatives transactions, with some exemptions for primary-market sales and trades with the ECB.
The Brussels-based European Commission has resisted calls to exclude derivatives and secondary-market trading from the tax proposal, even when those trades involve government bonds. The commission has estimated that any increase in borrowing costs would be offset by income raised.
The current proposal doesn’t give enough weight to the tax’s effects on transaction costs, price formation, volatility and bid-offer spreads, according to the subcommittee’s letter. It also runs the risk of reducing trading volumes and damaging sovereign debt markets that already are smaller and less liquid.
Sovereign borrowers might also face “undue consequences” on the maturity profile of their borrowing, along with possible incentives to take on more currency risk, the subcommittee letter said.
“The proposal -- as it is currently drafted -- negates the existence of a business model in sovereign debt markets, in which market-making is the corner stone of liquidity,” said the document. It also “does not consider the potential impact taxation of derivatives will have on the tapping of new foreign currency bond markets by sovereigns, as cross-currency swaps will be more expensive.”
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