Given the rumblings, we would be surprised if the ill-advised Financial Transactions Tax went through in anything resembling its current form; it just doesn’t work and would be massively self-defeating for the governments involved. Our post yesterday was on the impacts of the FTT on repo and debt markets. The next piece of bad news on the impacts of the proposed tax comes from SunGard, who put out an analysis yesterday using their ASTEC securities lending database.
Here’s what SunGard says:
“Ignoring the onward transactions (where the prime broker lends the securities to their own clients such as hedge funds) which would also attract a levy of 10bp, we can see immediately that 20bp has been shaved from the gross revenue generated for the beneficial owner of the securities on loan. Taking the agent’s fees at a typical 15% (although this can vary significantly) this leaves the beneficial owner with an income in the region of half their prior levels.” This logically would result in many beneficial owners pulling out of the market, leaving demand and costs spiking for the remaining inventory.
We agree with SunGard’s synopsis that multiple regulations would be affecting the market at once. The FTT would take high quality collateral out of the market at the same time reducing the amount of GC on loan (or at least that GC would now become Special). SunGard thinks that the aggregate cost of these regulations on borrowing would add up to 60 bps, and this would be passed on to end investors.
The thing we really don’t understand here is the continued emphasis on the FTT when all the evidence that shows that these taxes are self-defeating in their intention to raise revenues. We predict 0% chance of the 11 EU countries raising the EUR 57 billion they expect.
Already France’s Treasury is saying that their revenues in 2012 were half what they had hoped. Tax News reports that “France’s financial transactions tax generated a mere EUR200m (USD269m) for the state between August and November last year, less than half the amount expected (EUR530m). Taking into account December’s transactions, for which the tax will be collected in January, the sum will reach an estimated EUR250m. The state had predicted annual revenues from the tax of EUR1.6bn.”
More evidence suggests that the latest round of FTTs are not going to end well. According to The Economist, typically a fair observer of things financial, “Trading activity in French equities across Europe fell by 16% in the three months after the tax was applied compared with levels in May to July, notes Equiduct, an electronic-trading platform. That is a notably bigger drop than was seen for other European stocks. The fall was deeper in lower-capitalised stocks subject to the FTT; trading in stocks not subject to the tax actually rose by 19%.”