LONDON, March 11 The European Union's planned
financial trading tax could strangle the region's secured
funding market just as it recovers from the financial crisis, an
industry official warned on Monday.
The proposal to tax transactions in the repo market, where
banks commonly use government bonds as collateral to raise
funds, could also squeeze funding to the rest of the economy,
Godfried de Vidts, Chairman of the International Capital Market
Association's European Repo Council said.
"The market liquidity will dry up totally because the cost
is so prohibitive that people will not do repo transactions with
each other. The repo market will cease to exist," de Vidts told
Reuters by telephone from Paris.
The Repo Council, which represents major banks active in the
market, wants repo transactions to be exempted from the tax and
was discussing the issue at its annual general meeting in Paris
on Monday before taking it up with European Union authorities,
de Vidts said.
The trading tax, intended to make banks pay for aid they
received in the financial crisis, would be set at 0.01 percent
for derivatives and 0.1 percent for stocks and bonds and aims to
raise 30-35 billion euros annually.
It has already been approved by 11 European Union countries,
including Germany and France. Further approvals are needed in
the EU before it can take effect.
Gabriele Frediani, head of electronic trading platform MTS,
urged a rethink of the tax at a conference last week, saying
that the European repo market could shrink by 99 percent if the
proposal was adopted. "The repo market will disappear," he said.
According to the latest ICMA survey, the European Central
Bank's 1 trillion euros of cheap three-year funds continued to
stifle repo market activity towards the end of last year.
The twice-yearly survey showed the amount of business
outstanding in the market fell to 5.611 trillion euros by Dec.
12 from 5.647 trillion in June 2012. The survey was conducted
before European banks began making early repayments of the ECB's
three-year funds on Jan. 30.
Repo deals reached a high of 6.204 trillion in December 2011
and a low of 4.633 trillion reached in December 2008, at the
height of the financial crisis which froze interbank lending.
The survey showed a rise in German and French government
bonds used as collateral as investors stopped hoarding
higher-rated assets, after an offer by the ECB to buy bonds of
struggling states who ask for aid improved sentiment in euro
The use of bonds issued by Italy, one of the countries at
the forefront of the euro zone debt crisis, edged up to 8.7
percent from 8.3 percent in June 2012 while that for fellow
straggler Spain slipped to 4.9 percent from 5.0 percent.