Europe's economy could suffer a drop of up to 2% in its struggling recovery because of the proposed financial transaction tax, according to a report published today by the Alternative Investment Management Association.
Aima said estimations of its effect on European GDP are from a reduction of 0.56% (€86bn), to a reduction of 1.76% (€286bn) when taking into account the possibility of businesses moving outside the EU.
Aima added the IMF had estimated a Tobin tax at just 0.1% could reduce the market value of a typical S&P 500 stock by 7.6%. This was because of less demand, higher costs to buy the security, wider spreads, and less liquidity.
The group said even if the tax is just 0.01%, studies showed prices could halve in value in cases where investors plan to hold securities for just one day. This is because demand could weaken because of the extra return investors needed to cover the tax.
When the IMF studied the 1% tax on equities Sweden introduced in 1983, it found the levy caused an average decline of 5.3% in the value of Sweden’s OMX equity index in the 30 days before the tax’s introduction.
Aima also pointed to the possibility market participants would “face greater incentives to reduce turnover…causing a decrease in market liquidity and widening of spreads.”
Again, Aima pointed to Sweden, where in 1989 a 0.002% to 0.003% tax on bond transactions saw an 85% fall in trading compared to average volumes the previous summer.
Trading in futures on bonds and bills in Sweden fell by about 98%, Aima said. Trade in options “essentially disappeared”.
“The tax rate proposed by the Commission is three to five times the tax rates imposed in Sweden and, consequently, its impact could be significantly worse.
“The proposed FTT would also create unintended investment incentives, undermining sound asset management practices such as diversification, proper hedging and efficient execution. The incentivisation of investment in ‘riskier’ alternatives such as derivative instruments – forcing asset managers to undertake greater levels of risk to deliver the same level of return to investors as they had done previously – could negatively impact portfolio performance for pension funds and more conservative fixed income portfolios.”
There has been a deluge of comments following the UK general election, its outcome, and what it means for the Brexit process going foward. InvestmentEurope and its sister titles have been gathering a number of these comments below, and will keep adding...