Anticipated €50bn cash-flow drag from FTT
15 January 2014 London
Image: Shutterstock
There will be an estimated an annual cash-flow drag of €30–50 billion resulting from the Financial Transaction Tax, suggested a report.
The estimate was given by consulting firm Oliver Wyman, who was commissioned by the Association for Financial Markets in Europe (AFME) to evaluate the impact of the EU’s proposed FTT on European end-users.
The analysis in the report is based on transparent data sources, methodologies supported by existing studies, and a series of interviews with both dealers and end users.
The annual cash-flow drag would be realised in three different ways, said the report. Firstly, securities issued by EU-11 entities would fall in value as expected future cash-flows from the securities decline, imposing losses on holders of those securities.
Secondly, EU-11 corporates and governments would find future fund-raising through the capital markets more expensive, as a result of these lower valuations.
And thirdly, all parties would find it more expensive to manage financial risks, such as interest rate and currency risks on an ongoing basis.
These effects, said the report, would have material costs on end-users. Corporates would face annual costs of €8 to 10 billion, equivalent to 4 to 5 percent of post-tax profits in the impacted economies.
Governments would face annual costs of €15 to 20 billion, equivalent to approximately 1 percent of their annual debt issuance, and investors would face a one-off decline in the value of their investments of 4 to 5 percent (equivalent to a €260 to 340 billion decline in asset values). Additionally, they will face annual costs of €5 to 15 billion in increased risk management costs
While end-users are not the intended targets of the tax, the report finds that they are likely to bear heavy costs and that these have been underestimated to date.
These effects, it said, will have implications for the real economy and reduce the income generated by long term savings and corporate investments. In particular, it is believed that two effects have been underestimated: cascading taxes paid in the financial system are too large to be absorbed by the financial system and so would in large part be passed on to end users; and reduced liquidity in the system would increase transaction costs for end-users.
In its Q1 2014 report, the International Capital Market Association (ICMA) added that there would likely be material second order effects not quantified Oliver Wyman’s study in the bank funding markets, on monetary policy transmission, and on the competitiveness of EU-11 banks in derivative markets and corporate banking.
The estimate was given by consulting firm Oliver Wyman, who was commissioned by the Association for Financial Markets in Europe (AFME) to evaluate the impact of the EU’s proposed FTT on European end-users.
The analysis in the report is based on transparent data sources, methodologies supported by existing studies, and a series of interviews with both dealers and end users.
The annual cash-flow drag would be realised in three different ways, said the report. Firstly, securities issued by EU-11 entities would fall in value as expected future cash-flows from the securities decline, imposing losses on holders of those securities.
Secondly, EU-11 corporates and governments would find future fund-raising through the capital markets more expensive, as a result of these lower valuations.
And thirdly, all parties would find it more expensive to manage financial risks, such as interest rate and currency risks on an ongoing basis.
These effects, said the report, would have material costs on end-users. Corporates would face annual costs of €8 to 10 billion, equivalent to 4 to 5 percent of post-tax profits in the impacted economies.
Governments would face annual costs of €15 to 20 billion, equivalent to approximately 1 percent of their annual debt issuance, and investors would face a one-off decline in the value of their investments of 4 to 5 percent (equivalent to a €260 to 340 billion decline in asset values). Additionally, they will face annual costs of €5 to 15 billion in increased risk management costs
While end-users are not the intended targets of the tax, the report finds that they are likely to bear heavy costs and that these have been underestimated to date.
These effects, it said, will have implications for the real economy and reduce the income generated by long term savings and corporate investments. In particular, it is believed that two effects have been underestimated: cascading taxes paid in the financial system are too large to be absorbed by the financial system and so would in large part be passed on to end users; and reduced liquidity in the system would increase transaction costs for end-users.
In its Q1 2014 report, the International Capital Market Association (ICMA) added that there would likely be material second order effects not quantified Oliver Wyman’s study in the bank funding markets, on monetary policy transmission, and on the competitiveness of EU-11 banks in derivative markets and corporate banking.
NO FEE, NO RISK
100% ON RETURNS If you invest in only one securities finance news source this year, make sure it is your free subscription to Securities Finance Times
100% ON RETURNS If you invest in only one securities finance news source this year, make sure it is your free subscription to Securities Finance Times
