TUESDAY’S announcement by Angela Merkel and Nicolas Sarkozy that they intend to implement a financial transactions tax in the EU was bad news all round. But such a tax would be particularly damaging to those within the forex market.
Forex is the largest financial market in the world, with a £2.5 trillion average daily turnover. That is more than 12 times the average daily turnover of the global equity market. The annual FX turnover, at more than 10 times world GDP, equates to more than £300 a day for every man, woman, and child on earth.
The UK is home to the largest share of the FX market and would be the hardest hit by a tax on financial transactions, with City jobs and London-based business operations being driven abroad. “I’m against the Tobin tax or any form of financial transactions tax,” says Brendan Callan, chief executive of FXCM Europe. “It will hurt business here in the UK. At the very least, we could all expect that instead of international banks and brokerages encouraging overseas clients to open and trade through their UK/European based offices, they will tackle each region locally instead, or direct that business to the US or Asian offices.”
And as Nick Beecroft, senior markets consultant for Saxo Bank, points out, there’s an age-old tradition among politicians to blame big, bad speculators; from Harold Wilson’s “Gnomes of Zurich”, (apparently responsible for the 1964 sterling crisis), to Malaysian Prime Minister Mahatir’s 1997 attack on George Soros in particular, and hedge funds in general.
“It is so much easier to blame such scapegoats than to admit to the fundamental economic flaws which are actually driving a currency down, or a government bond yield through the roof,” says Beecroft. He also points to the law of unintended consequences: market liquidity would be severely diminished, as the number of market counterparties would be reduced, along with their enthusiasm to enter into large transactions. “This would mean, for example in FX, that the prices ‘real’ hedgers – corporate treasurers for example – would have to pay would be that much worse, directly impacting the profitability of industry and doing nothing to help the fledgling economic recoveries of the West.” Beecroft adds: “In some currencies it might even become impossible to find any FX hedging prices at economically viable prices.”
European officials have been unclear as to how the tax would be implemented, but the European Commission has said that it wants to see it in place by January 2014. “From the City’s perspective, the worst case outcome would be for the tax to be adopted in the European Union but not elsewhere in the world,” says Neal Todd, tax partner at Berwin Leighton Paisner. “As the major trading centre in Europe, London would lose business to the rest of the world and end up subsidising the Eurozone countries.”