April 3, 2013 / 10:11 AM / 5 years ago

EU transaction tax seen raising cost of issuing UK debt

LONDON (Reuters) - A planned EU tax on securities transactions will add billions of pounds to the cost of issuing debt in Britain, hitting companies and government finances even though the country will not impose the levy, a study said on Wednesday.

The City of London Corporation, home to much of Britain’s financial services industry, said a study it commissioned estimated the tax would add 4 billion pounds to the cost of issuing UK debt if it were in force this year.

Eleven euro zone countries intend to introduce the tax on stock, bond and derivatives transactions next January, raising up to 35 billion euros a year to make banks pay for aid they received in the financial crisis.

There are provisions to ensure the levy is applied no matter where in the world securities from the 11 states are traded, though it is unclear how and by whom the tax would be collected, especially in non-participating countries.

A pan-EU proposal for the tax failed due to opposition from Britain, home of Europe’s largest financial services industry, as well as other member states including Sweden.

The study, carried out by consultancy London Economics, estimated the cost of capital would go up even for countries not imposing the tax.

The cost of capital raising for firms would rise by 100 basis points or more in non-participating member states because of their reliance on short-term debt capital markets, it said.

“The financial transaction tax is an ill-conceived idea that risks significantly damaging economic prospects across Europe,” said Mark Boleat, chairman of the corporation’s policy committee.

“Not only would it adversely affect the cost of sovereign debt but it would also make it more difficult for businesses across the continent to access funding,” Boleat said.

The study said the tax would distort competition and have a greater negative impact on returns from corporate and sovereign debt from non-participating EU states as they tend to issue shorter-term bonds that carry lower returns.

There could be a “substantial” reduction in activity on the repurchase or repo market - where government bonds are used as collateral to raise funds - due to increased costs, putting them at a disadvantage to secured loans, the study added.

The International Capital Market Association (ICMA), which represents debt market participants, said the tax would make short-term financing activities uneconomic.

“This will disrupt bank financing conditions, undermine collateral efficiency needed for the safety of financial markets, and lead to more costly primary debt markets,” said David Hiscock, senior director at ICMA.

ICMA will publish its own report on the tax’s likely impact on the repo market next Monday in Brussels. Gabriele Frediani, head of electronic trading platform MTS, said last month the tax would kill the European repo market.

Last week a panel of UK MPs criticised the government and the financial sector for not doing enough to stop the tax, saying Britain should go to court to halt the plans.

Manfred Bergmann, European Commission director for indirect taxation, said last month the tax would not harm Britain and its government could not be forced to collect the levy.

Reporting by Huw Jones; Editing by Stephen Nisbet and Mark Potter

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