EU Nations Seek Transaction Tax Answers on Repurchase Agreements

Eleven European Union nations that plan to introduce a common financial-transaction tax are seeking assurances from the European Commission that the levy won’t drive up their borrowing costs.

The Brussels-based commission should provide data about the impact of the tax on the market for so-called repurchase agreements, and by extension “on the funding cost of the central government and the real economy,” according to an April 16 working document prepared by the 11 states.

The EU estimates the tax could raise 30 billion euros ($39 billion) to 35 billion euros a year. To become law, it has to be approved by the participating nations: Belgium, Germany, Estonia, Greece, Spain, France, Italy, Austria, Portugal, Slovenia and Slovakia. All 27 EU nations can sit in on the talks and have the option to join.

The 11 states are trying to address concerns that the plan could lead to the “extinction” of repo operations that keep government borrowing costs down by allowing traders to hedge their risks, according to the document. The commission has not been “fully clear” on whether revenue from the tax would offset potentially higher borrowing costs, the nations said.

The move follows warnings from Italy that the tax, as formulated in a commission proposal, could harm secondary-market sovereign-bond trading.

“Transactions on government bonds must be excluded,” Italian envoy Ferdinando Nelli Feroci told reporters in Brussels on April 19. This is a “red line” for Italy and not up for negotiation, Feroci said.

‘Full Commitment’

“It’s very normal in any negotiating process that member states would seek clarifications on the proposal,” Emer Traynor, a spokeswoman for Algirdas Semeta, the European commissioner for taxation, said by e-mail.

“We will be replying in detail to the issues they have raised at the next technical meeting on 22 May, and expect that we will be able to allay many of their concerns,” she said. “The last technical meeting showed that there is still full commitment from the 11 member states to move ahead with the common FTT.”

The tax proposal is also coming under pressure from EU nations that have declined to participate on concerns that it will also hit traders based outside the 11 countries’ borders.

Luxembourg’s Finance Minister Luc Frieden said he “cannot exclude” a challenge to the EU’s proposal because of its impact on his nation and other non-participants. Last week, the U.K., home to the EU’s largest financial center, went a step further and began legal action at the European Court of Justice to guard against future economic damage.

The proposed levy could be collected worldwide as soon as the start of next year by France, Germany and the nine other EU nations that have so far signed up, if the effort stays on schedule. To stop traders from escaping the levy by operating outside the tax’s zone, the EU plan invokes “residence” and “issuance” ties to firms in participating nations.