EU Investment Bank Sees $2.1 Billion Penalty of Transaction Tax

The European Investment Bank says it would have to absorb as much as 1.65 billion euros ($2.1 billion) in extra costs under proposals for a European Union financial-transaction tax.

The tax, as proposed, would raise the Luxembourg-based EIB’s funding costs and make its hedging activities more expensive, according to an EIB document obtained by Bloomberg News. The report says this impact would translate to an increase of 11 to 32 basis points in pricing on the bank’s loans, which support cross-border infrastructure projects and financing for small businesses.

“This would represent a material increase to the average margin applied to EIB’s clients, at a moment when the EIB Group is asked by member states to foster growth through increased volumes of lending at competitive terms,” said the document, which is undated. The EIB wants a blanket exemption for any trading activity related to it, similar to the European Central Bank’s proposed treatment. An EIB spokesman declined to comment on the report when contacted today.

European policy makers are increasingly leaning on the bank to help combat record euro-area unemployment and a second year of recession. EU leaders meeting in Brussels today are citing the EIB as one of their main tools for increasing financing for energy-efficiency projects. ECB President Mario Draghi has invoked the EIB as one avenue for helping unlock credit to small and medium-sized businesses, whose access to funding has been severely hampered by the region’s financial crisis. The EIB is also key to a plan to counter joblessness.

Tax Patchwork

The EU is trying to remedy what it sees as a “patchwork” of levies and rein in speculative trading it sees as having exacerbated the financial crisis. 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 narrow the scope of its tax proposal, even when those trades involve government bonds or other official-sector activity. The commission has estimated that any increase in borrowing costs would be offset by the income raised.

The EIB letter recommends excluding all transactions involving sovereign bonds from the tax’s impact. EU debt managers, in an April 18 analysis, said current plans to tax secondary-market and derivatives trades involving sovereign bonds will damage government borrowing markets.

EIB Concerns

An EU working group today was slated to discuss the EIB’s concerns, according to a May 22 report from Ireland, which holds the EU’s rotating administrative presidency. The working group also tackled concerns from participating nations about the tax’s impact, according to a European Commission report prepared for the meeting.

EU Tax Commissioner Algirdas 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.

In response to concerns that the tax would damage repurchase agreement markets, the commission said the plan “should not dent the attractiveness of government bonds as compared to the attractiveness of other comparable securities,” according to the commission report. It said market participants also could consider pledging securities to central banks as a way to blunt the tax’s impact.

The commission report said nations could consider making repos subject to the lower tax rate on derivatives rather than the rate proposed for stock and bond trades. It recommended against setting a lower tax rate for secondary-market trades on sovereign debt, saying that would hurt government revenues.

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