Pension funds and firms to be hit by EU financial tax on currency trading

Tim Wallace
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EUROPE’S planned financial transactions tax (FTT) could hit international trade and investment hard as it risks driving up the cost of currency trades, according to a study out today from a leading finance industry body.

Businesses across the continent will see transaction costs rise by between 300 and 700 per cent, the Association of Financial Markets in Europe (Afme) warns in the report.

Pension fund managers will be hit even harder – they could see costs rise by between 700 and 1,500 per cent, the group estimates.

In cases where transactions involve short-dated swaps, that could hit 4,700 per cent as the transaction cost is very low but the tax will be charged on the nominal value of the currency involved in the trade.

The European Commission wants taxes of 0.01 per cent on derivatives trades and 0.1 per cent of share and bond trades on all deals done either in the EU or with any counterparty from the EU.

It argues that while this will have a negative effect on trading volumes and financial markets, it is needed to make the financial sector pay for the damage of the crisis and to stabilise markets by cutting down speculation.

However AFME expects savers like pensioners to be hit hard, and for the rest of the economy to feel the pain in lower investment and trading activity.

The group calculates that a typical pension fund manager with an annual transaction tax bill of €1.2m (£1m) currently could see that rise to €57.6m under the new tax – a bill that can only be passed on to savers.

And it fears firms too will be hurt by the charges.

“Given the need for Europe to kick-start economic growth, it is crucial to ensure that European companies of all sizes are able to compete internationally,” said AFME’s James Kemp.

“Foreign exchange products are central to their ability to do this. In addition, the proposed tax risks becoming a disincentive for businesses to hedge risk which could increase their earnings volatility and business risk.”

The report notes that businesses use currency markets for import and export payments, repatriation of earnings made overseas, investing across borders, and buying foreign businesses – all key, value-adding activities that would be hit hard by the planned financial transactions tax.

Even firms and pension funds outside Europe risk being hit by the tax, if they do business with firms inside Europe, thus hitting their investment in the continent, AFME believes.

A non-European firm trading foreign exchange forwards, swaps or options products would see the transaction costs rise 216 per cent, it estimates. The same products traded by a fund manager would rise in cost by 4722 per cent.

And European fund managers trading the instruments outside the EU would see transaction costs jump by 1027 per cent.