The impact of a financial transaction tax on corporate and sovereign debt

Sector: Finance | Financial markets and Institutions
Client: International Regulatory Strategy Group
Published: April, 2013
Document type: Report 
Tagged: EC/EEA qualitative analysis quantitative analysis UK

Commissioned on behalf of the International Regulatory Strategy Group and authored by London Economics, this paper examines the impact of the European Commission’s proposed financial transaction tax (FTT) on corporate and sovereign debt markets.

The research quantifies the additional cost the FTT is likely to impose on corporates and sovereigns using debt security markets to raise capital, in addition to the potential changes in market participant behaviour it may effect, in the context of the Commission’s aims to avoid distortions of competition and ensure the efficient functioning of financial markets. The research finds an uneven incidence of effects across participating and non-participating Member States, types of debt security and bond maturities. Behavioural impacts anticipated include difficulties in collection, and the potential for capital, instrument and geographic substitution effects. The FTT is also likely to suppress activity on repurchase markets, negatively affecting the central and commercial banks using them to maintain liquidity.

Looking beyond the financial markets, the research discusses the impact of an FTT on end-users and the implications for the wider EU economy. An increased cost of capital for corporates is likely to lead to a decline in business investment, while the associated increase in the cost of government debt is likely to necessitate increased taxation or reduced spending to make up the shortfall. Taken together, the combined effect on corporate and sovereign capital raising will have a detrimental impact on EU GDP.