The politics of financial reform

The Financial Transaction Tax (FTT), otherwise known as the Robin Hood Tax, is likely going to be reviewed and postponed. It is a levy of 0.1 % on the trades of stocks and bonds and 0.01% on derivatives transactions involving at least one financial institutions based in the EU. The political tensions around this reform are mounting due to the design, feasability and the economic implications of the reform.

States dependency of finance means the tax base will be a crucial question. An FTT can tax stocks, bonds, forex, options and futures. It can tax the primary market and/or the secondary one, regulated market and/or OTC. If only one kind of instrument is targeted, the reform risks creating a bias in favor of others financial assets. If government bonds are not included in the tax base, it is likely to draw liquidity out of the corporate bond market, and raising the costs of capital. But taxing public sector debt is not uncontroversial either, as it will impose higher transaction costs, thereby raising government borrowing too. 

So support for the reform is starting to wane. Germany and France are worried about the backfire effect this tax could have. Austria and Belgium want an expection for pension funds. 

One argument concerns the impact it will have on European banks borrowing overnight using repurchase agreements (or repo). The borrowing bank sells liquid instruments that it agrees to repurchase later at a higher price. As the costs of borrowing overnight thourgh repo is very low, the tax would kill this segment. The ICMA, a lobby group, already made clear that the incidence of the reform over the repo market will be catastrophic. (That being said, the importance of the proper functioning of the repo market, not the most glamorous market of all, is often overlooked). The reform thus might need a carve-out for repo.