German Bonds Face Selloff at Denmark’s ATP on Trading TaxMatthew Winkler, Peter Levring and Maud van Gaal
Denmark’s biggest pension fund, which holds $36 billion of long-term German bonds, says it may have to sell the debt unless Chancellor Angela Merkel moves to block a tax on financial transactions.
Such a levy “would instantly destroy our business model and would force us to invest differently,” Carsten Stendevad, chief executive officer of the $140 billion ATP fund, said in an interview at his office in Copenhagen. “The moment they would do this, many investors would start looking for other safe havens.”
Investors overseeing Europe’s pension savings are adding their voice to bank industry warnings that a tax on financial trades will miss its mark and end up hurting average citizens. ATP estimates the levy would cost it “hundreds of millions of dollars,” eroding pensioners’ returns. Merkel said last week that the German government is listening to investor complaints about the proposed levy and will take their views into account.
The yield on Germany’s bond maturing in 2044 gained six basis points today to 2.47 percent as of 5:15 p.m. local time.
Moving ahead with a tax model that hits pension savers “would obviously be a very bad thing to do,” Merkel said in a June 14 interview at the Chancellery in Berlin. Still, she restated her government’s commitment to some form of tax on transactions, citing the disparity between value-added taxes on consumer goods and “basically free” financial transactions.
Policy makers in Europe originally proposed the tax in an effort to prevent a repeat of the worst financial crisis since the Great Depression. European Union Tax Commissioner Algirdas Semeta has said the levy would encourage pension funds to avoid secondary markets and stick to long-term investments.
‘Pile of Bonds’
The proposal doesn’t take into account how pension funds operate, said Guus Warringa, an Amsterdam-based board member and chief legal counsel at APG Asset Management, which oversees 342 billion euros ($458 billion) in pension assets.
“Pension funds are indeed long-term investors, yet the assumption they have a pile of bonds which they put into a safe until they mature 20 years later is simply wrong,” Warringa said. “Markets, interest rates change. It would imply we would have had to keep our exposure to Greece unchanged. We wouldn’t get away with such a policy.”
APG, the investment management unit of Heerlen, Netherlands-based APG Algemene Pensioen Groep NV, would probably “invest less in countries that have a financial transactions tax,” he said.
Merkel said last week she’s talking to investors about the financial transactions tax. “I know their concerns and we have not come to the end of our deliberations,” she said.
The EU unveiled its plan on Feb. 14 for a 0.1 percent tax on stock and bond trades and 0.01 percent on derivatives trades with ties to participating countries. To prevent traders from escaping the levy by operating outside the tax zone, the EU plan invokes “residence” and “issuance” ties to firms in participating nations. That means, for example, that a French bond traded in London would still be affected.
The taxes would be collected worldwide by Germany, France and nine other EU nations that have signed up. Denmark, where ATP is based, has rejected the tax in its current form, as has the Netherlands.
The proposal “will be an entirely different matter from what was intended if it impacts those nations not participating and disrupting the inner market,” Danish Economy Minister Margrethe Vestager said in a June 14 interview during a conference on the Danish island of Bornholm. “This will obviously have consequences for Denmark, as it will for all of the 16 EU nations that are not part of this.”
Merkel’s Christian Democratic Union party, which faces September elections, has backed a financial transaction tax. The CDU is urging that the measure be introduced “as quickly as possible,” while “safeguarding the interests” of Germany’s financial industry, according to a draft of the party’s campaign platform.
Stendevad, 40, who left his job as a managing director at Citigroup Inc. in New York to take the helm at ATP in April, said efforts to rein in the financial industry are needed, though the methods under consideration are proving clumsy.
“Even things with good intentions can have significant unintended consequences,” Stendevad said. The proposed financial tax is “a good example. The bill will be paid by the Danish pensioners, not the banks,” he said.
Should the tax pass, the challenge for ATP would be to find a suitable alternative to German bunds, he said. Other AAA rated euro-region bonds such as those from Finland and the Netherlands lack the liquidity ATP needs, while U.S. Treasury bonds have a currency risk, Stendevad said.
ATP already owns 70 percent of 30-year Danish government bonds and the remaining stock is too small to fill the hole that would be left if the fund sold its bunds, Stendevad said.
“You really have to think through all the unintended consequences of these regulations,” Stendevad said. “Regulation as retribution is not a good tool.”