Focus on southern Europe – Managers prepare for possibility of Greek debt tax charge

DST Global Solutions is used to helping their investment management clients solve complex correlation analysis, portfolio performance measurement and attribution challenges and monitor risk exposure, for their investment portfolios.

More recently, though, as well as this, the asset servicing, data management and analytical software provider has been helping clients with some ‘tax planning’ – not necessarily the kind of tax planning they wanted, nor possibly expected, to have to do.

The possible departure of Greece from the euro and return to its drachma, has raised the possibility of Greece – and then maybe other exiting countries – creating potential tax implications relating to debt instruments they have issued in the past.

One challenge for investors holding their debt is those who bought Greek debt denominated in euros did not always think of labelling the country source of such fixed income items in their portfolios. With the shared currency, there was no such pressing need to do so.

But that has changed – definitely for Greece, potentially also for other peripheral nations’ paper.

Peter McKenna, market development director in DST Global Solutions’ investment management division, says: “In considering a potential euro breakup in part or whole, numerous challenges emerge, one of these for example, is having to go back and to try to piece together the purchases and sales for the assets that need to be redenominated – you would have to be able to determine what lot a Greek bond was bought in, and for that, you have to able to track back.”

It is not only a logistical challenge, it is also a compliance issue because Great Britain’s watchdog, the Financial Services Authority, has required all regulated managers to have plans for such a scenario.

Once relevant investments/items are identified, McKenna says, coping with any redenomination will not be difficult, but the trawling could cost time.

Arun Sarwal (pictured), CEO of DST Global Solutions’ investment management division, adds: “A redenomination might not happen within months’ if not years’ warning as occurred with the introduction of the euro – but could instead happen over a very short period of time.”

DST Global Solutions are helping their clients conduct ‘dry runs’ of break-up scenarios and redenominations of some holdings, through planning activities and scenario testing, in some cases using clients’ in-house systems, or in some cases where needed, isolated systems at DST.

“One of the big issues with doing that is to assess the resource requirements and capacity requirements needed, both in terms of pure processing power – and you would have to make a judgement call on what they will be – and also in terms of the people behind it, because there will be a significant amount of manual intervention taking place,” Sarwal says.

 

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