The divisions in the EU over how far the FTT should extend have reached new heights. Recently Christian Noyer, Governor of the Central Bank of France, pushed back hard on how far the FTT should go while Germany is agreeing to support it. This gets to a main philosophical point of the FTT to begin with: who is it targeting and what is the main point anyways?
The disagreement du jour in France is whether the Europe-wide FTT should extend to government bonds, a tactic tried by Sweden over 20 years ago with disastrous results for the ability of governments to fund their own economies. According to the Economic Times of India:
“The proposals by the European Commission pose ‘an enormous risk in terms of the reduction of output in the FTT jurisdiction; increased cost of capital for governments and corporates; a significant relocation of trading activities and decreased liquidity in the markets,’ Noyer, who is also governor of the Bank of France, told the newspaper.
‘The commission’s draft is a non-starter and needs to be entirely revised,’ he said.”
We agree: Europe’s FTT is a non-starter. According to analysis by Deloitte, the FTT’s presumed 10 bps tax on each participant in a trade could result in an effective tax of 80 bps through all phases of the transaction including clearing. This is a deal killer for government bonds transactions, not to mention repo and securities lending. A summary of the ICMA’s report about how bad the FTT is for repo and collateral can be found here. A summary of ISLA’s version for securities lending is here.
Meanwhile, France’s own FTT isn’t doing all that well either. Meant to tax banks, the tax has really hit average investors and served to push institutional trading on large cap French stocks both overseas and into synthetics. France’s tax has missed its mark financially as well, with 2012 revenues coming in less than half of what was initially projected. See this write up from Tax News for details.
If governments wanted to get serious about taxing banks they would go after the balance sheet, not transactions. Transactional taxes just get passed on to the client; if the client finds the expense too high they won’t do the trade. In the case of Europe’s proposed FTT, the tax applied to repo would effectively kill the market as the entire trade would quickly become unprofitable without raising fees, and clients are unlikely to bear the new cost. It’s a serious situation.
We find Europe’s FTT to be a truly misplaced proposal both philosophically and practically. The sooner that Mr. Noyer and others push back to put this monster back into its cage, the better.