EUROPE – The European Commission's financial transaction tax (FTT) could raise the cost of UK gilt issuance by £4bn (€4.7bn) in 2013 alone, ultimately impacting pension funds, the City of London Corporation has claimed.
According to a report published the City of London, member states not participating in the FTT – such as the UK – could be more severely affected, in the UK's instance due to companies greater reliance on the bond markets over bank loans.
The report also examined the impact on corporate debt markets and estimated that firms in the UK would see the cost of raising capital increase "significantly" by 100 basis points or more.
The City of London Corporation added that, in the context of challenging economic conditions, difficulties in accessing finance would further depress investment and GDP in turn.
Mark Boleat, policy chairman at the City of London Corporation, argued that the FTT was an "ill-conceived" idea that risked "significantly damaging" economic prospects across Europe.
"Not only would it adversely affect the cost of sovereign debt but it would also make it more difficult for businesses across the continent to access funding", he said.
"In reality, the FTT is likely to negatively affect end users such as pension funds, while generating less revenue than estimated due to the behavioural change that would result."
Boleat urged the EU to reconsider the FTT proposal in light of the "negative impact" it would have on investment, job creation and growth.
The City of London Corporation also insisted in its report that the tax could distort competition between various financial instruments, contrary to its original goal.
According to the authority, the tax as outlined would impact more significantly returns for corporate bonds from non-participating member states, while it would also hit returns on sovereign bonds harder than corporate bonds.
The research also indicated that the FTT could lead to a "substantial" reduction in activity in the repo market due to increased costs on counterparties.
"This could make it more difficult for banks to use repo markets for short-term funding that is linked to lending," the City of London Corporation said.
"The repo market would be placed at a disadvantage to other financial instruments because the former are liable for the tax and the latter are not despite being economically similar."
Earlier research by the International Capital Market Association (ICMA) prevoulsy warned of the impact the FTT proposals to tax repo transactions could have on this market.
Godfried De Vidts, chairman of the ICMA's European Repo Council, said at the time that the FTT proposals put the economic viability of repo – including tri-party transactions – at significant risk, which could result in less liquidity being provided to the real economy.
The FTT – the implementation of which was originally backed by France and Germany – would impose a levy of 0.1% on equity and fixed income transactions and 0.01% on derivatives transactions between financial institutions.
So far, 11 European countries – comprising Germany, France, Spain, Italy, Austria, Belgium, Slovenia, Portugal, Greece, Estonia and Slovakia – have said they support the tax, resulting in the EU member states triggering a process of enhanced cooperation, whereby policy proposals are jointly drafted.
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