“To Bin or not To Bin? That is the question”; photo by Steven-L-Johnson (flickr)

Quoting from wiki.ironchariots.org:

The Great Green Arkleseizure is a deity mentioned in a work of fiction by Douglas Adams, The Hitchhiker’s Guide to the Galaxy.

Although not offically considered a god, the Great Green Arkleseizure is nonetheless the creator of the universe according the the beliefs of the Jatravartid people of planet Viltvodle VI.

The powers that be in eleven of the Eurozone countries (EU11) want banks and high-frequency traders to live in fear of their new  Great White Handkerchief: the financial transaction tax (FTT). Pension funds and providers of products, especially guaranteed products, live in fear too:

The EU itself estimates that typical beneficiary of an actively risk-managed defined-contribution pension will lose about 8% of what would otherwise have been their final pension pot (check page 10 of their technical document here).

As the proposals stands today (EU press relase of Valentine’s Day), the tax will apply to transactions where any one of the below apply:

1. Where one or both counterparties to the trade are resident in the EU11
2. Where one or both counterparties act on behalf of someone resident in the EU11
3. Where the instrument being traded was issued in the EU11.

The commission, always helpful of course, gives an instructive example on how widely territoriality is to be understood. It is well worth reading lest you don’t believe me:

Two Chinese counterparties trading a Chinese OTC derivative contract will still have to pay tax if one of them acts on behalf of a Chinese branch of an industrial company in Germany, hedging risks residing within the Chinese branch.

Good luck with enforcing that one. But in any case the Coming of the Great White Handkerchief will not materialize, for if it did,

1. products “issued” in the EU11 would be less attractive to trade and therefore to hold. They will suffer a discount on day of issuance, i.e. raise less capital for the issuer. No-one, not even EU11 entities, should rationally look to the post-Tobin Tax EU11 to be their primary market for raising capital.
2. Most trades get won or lost over less than 1/10th of a percent. So trading counterparties in the EU11 will be priced out of almost any transaction that does not involve another EU11 entity or EU11-issued paper. New trading firms would then be irrational if they set up camp in the EU11. Existing trading firms may have to chose between relocation or reducing their activities to the (then shrinking, as per (1) above) EU11 market.

Once these consequences are understood, the question whether the FTT achieves its primary purpose of making banks pay, or of limiting high-frequency trading, or the worthiness of these goals becomes irrelevant.

For if this is a cure for financial evil, the side effects (for the EU11 countries themselves) are worse than the disease: shrinking the EU11 financial markets, shrinking incentives to raise capital within the EU11 (both these will make the champagne-corks pop in London!), and hurting hedging activities or real businesses in the EU11 or those affiliated with EU11 entities. Plus, taxing private pensions should be a big no-no in these times of demographic stresses on the state pension systems.

My prediction: The FTT discussion will go increasingly, and slowly quiet. It will go “To Bin”. And one day even the people of Viltvodle VI will forget to ask what happened to the Coming of the Great White Handkerchief.