Transaction tax supporters should recall the birth of the eurobond

Anthony Browne
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IF YOU drive from Milan to Rome this summer, you might take the Autostrada del Sole. As you shoot past Florence, think that if it wasn’t for the then nascent eurobond market, the road may never have been built. Fifty years ago, in July 1963, the company that built that road, Autostrade, offered the first eurobonds – dollar-denominated bonds issued in Europe. As the eurobond market burgeoned from this first $15m deal, European finance, with London at its centre, became truly international.

But the growth of the eurobond market resulted from an obscure tax that immeasurably changed the face of global finance in Europe’s favour. Now, European politicians have proposed a similarly obscure tax that will do the exact opposite.

The catalyst for this growth was President John F Kennedy’s so-called Interest Equalisation Tax. This taxed Americans 15 per cent on the purchase, from foreigners, of bonds and shares issued abroad, meaning they would have to pay tax on bonds like those of Autostrade. Instead of going to New York to raise capital, companies from around the world – including US ones – went to London, looking to avoid Kennedy’s tax. And banks followed their customers: by 1970 the number of foreign banks in London had more than doubled, and the number of US banks increased from just 14 in 1964 to 50 by 1973 – all to the detriment of Wall Street.

Europe is now similarly under threat. The Financial Transaction Tax (FTT) will see banks taxed every time they buy or sell shares, bonds, or derivatives from a bank headquartered in an FTT country. Worse still, banks from FTT countries will have to pay this “growth tax” when they trade in the Americas or Asia, but their competitors won’t.

As European banks’ access to capital markets becomes more expensive, companies will look elsewhere. Much as Kennedy’s tax drove business from Wall Street, the FTT will drive business away from Europe – perhaps back to New York, or to Singapore or Hong Kong, which lie hungrily in wait. Sweden introduced an FTT in 1984 and abandoned it seven years later, after half of all Swedish trading moved to London.

Moreover, such a tax could have reverberations that will last decades. By the European Commission’s own admission, FTT would see economic output fall. In a separate report Oxera, a consultancy, found that for each €1 raised through the FTT, the European economy would lose €2 of output. And the FTT will disproportionately damage London, where two-thirds of euro-denominated trading is transacted.

Small companies would find it more difficult to access funding, and that funding would be more expensive. Larger businesses would find it more expensive to hedge their risks. These include farmers who use derivative products to protect themselves against fluctuations in crop prices. Companies providing other consumer products – fixed rate mortgages, gas, electricity, petrol and diesel – would also be hit because they use derivatives to try to hedge against wholesale price rises.

There have been signs that some European politicians might be prepared to reconsider proposals for this tax on growth. But as its proponents drive down the Autostrada del Sole to their Tuscan villas for their summer holidays, they could do worse than remember the birth of the eurobond.

Anthony Browne is chief executive of the British Bankers’ Association.