Monday Dec. 2, 2013 Brussels

A European plan to tax a sweeping range of financial transactions is facing new delays even after winning the support of Germany’s biggest political parties, as participating governments remain divided on key details of the levy.

Berlin’s decision to push for a tax that would cover currency transactions could complicate negotiations, because the European Union’s executive arm has warned that such a move would violate the free movement of capital in the EU.

France, Germany and nine other countries are pushing ahead with a European Commission proposal to impose a levy on stock, bond and derivative trades, after discussions broke down a year ago on a European Union-wide financial-transaction tax. But at their first meeting in almost three months on Wednesday, representatives of the 11 states agreed that the tax wouldn’t come into force until 2015 at the earliest.

The tax was originally supposed to be implemented on Jan. 1, according to the commission’s proposal in February, but the commission said in June that the timeline had slipped by at least six months. “Given that [the 11 states] still need to draw up a compromise text, and then agree to it at the level of finance ministers…2015” is a more realistic date, an EU official said.

EU finance ministers aren’t expected to discuss the tax when they meet in Brussels on Dec. 10, as they focus instead on finalising a plan to centralise control of failing euro-zone banks—the next step in the bloc’s banking union project, EU officials said.

The tax aims to discourage speculative trading and ensure that the financial sector pays back part of what it received from taxpayers during the financial crisis. Under the commission’s proposal, a 0.1% levy would apply to share and bond trades and 0.01% to derivative transactions between financial institutions, if at least one party is located in the EU.

Negotiations had been on hold since Sept. 9, in part as national governments waited on the outcome of Germany’s Sept. 22 general elections. Chancellor Angela Merkel’s conservative CDU party won but failed to secure an absolute majority of seats, forcing it into coalition talks with the socialist SPD party.

But the talks had also been making little headway before September, as the 11 states remained divided over fundamental issues, including the scope of the tax and how to distribute the revenue. Meanwhile, EU lawyers suggested in early September that the plan would violate the rights of member states that didn’t sign up and could breach EU competition rules.

The legal service of the European Council, the body that represents member states, took issue with a central aspect of the latest plan that the levy must be paid if one of the counterparties to a trade resides in a participating EU member state.

The commission responded that it “strongly disagreed” with the council’s legal opinion, which isn’t binding, and would press ahead with work on the tax.

In recent days, the talks regained some momentum after Germany’s two main political parties pledged in their coalition treaty to “swiftly implement” a broad tax covering “shares, bonds, investment certificates, currency transactions and derivative contracts.”

In addition to the reference to the controversial currency trades, the coalition treaty also contains a significant caveat: that the tax should be structured so as to avoid “negative effects on pension instruments, small investors and the real economy.”

That concern is shared by a number of governments, which worry about the impact of such a sweeping tax on Europe’s still-weak economy and sovereign-bond markets, as well as on pension funds and personal savings.

The financial-services industry, —which has lobbied furiously against the plans published two studies in November underlining the potentially damaging impact of the tax. The first, by PricewaterhouseCoopers, found that the tax might reduce gross domestic product growth by between 0.3% and 2.4%, based on past studies, while the second, by Oliver Wyman, estimated it would cost pension funds and insurance companies up to EUR 50 billion each year.

The U.K. government began a legal challenge to the tax earlier this year, amid fears it would be expensive to collect and risk driving business away from London’s financial centre.

At Wednesday’s meeting, France and Italy continued to push for a watered-down version of the proposal that would more closely resemble their own national financial-transaction taxes, an approach that was also supported by Spain, a person familiar with the discussion said. By contrast, a number of smaller countries argued that the tax should cover as broad a range of instruments as possible, the person said.

Germany took a back seat at the meeting as its representatives awaited more specific instructions from Berlin, where the new government isn’t likely to be in place until Dec. 17, a person familiar with the discussion said.

Earlier this year, a consensus appeared to be building around starting with a more-limited tax on share trades, similar to Britain’s stamp duty, which could be expanded later, according to participants. The U.K.’s stamp duty covers only sales of stock in companies incorporated in the U.K.

Representatives of the 11 governments are scheduled meet again on Dec. 12 to discuss the plans.

Source: Tom Fairless, The Wall Street Journal

On November 22, 2013, Standard & Poor’s Ratings Services affirmed its ‘BB+/B’ long- and short-term foreign and local currency sovereign credit ratings on Romania. The outlook is positive.

According to Standard & Poor’s, Romania is steadily making progress in adjusting external demand, fiscal consolidation, and financial sector stability. The rating agency is therefore affirming the ‘BB+/B’ long- and short-term foreign and local currency sovereign credit ratings on Romania. The positive outlook incorporates the possibility that Standard & Poor’s could raise the ratings on Romania if the government sticks to its fiscal and reform programs. The decision follows Romania’s steady progress in adjusting the economy toward external demand, consolidating the fiscal accounts, and bolstering financial sector stability.

Standard & Poor’s believe Romania’s GDP growth will gradually strengthen over 2013-2016, helped by the continued rebalancing of its economy toward external demand. Over 2013-2016, the agency projects that Romania will post an average annual current account deficit of about 1.6% of GDP. The shift to external demand over the past five years has occurred primarily due to higher exports, leaving the expected 2013 trade deficit at between 3% and 4% of GDP, versus 14% of GDP in 2007. This adjustment has made Romania a more open economy, with exports that we project to exceed 45% of GDP in 2016, versus 30% of GDP in 2009. The export growth reflects Romania’s improved cost competitiveness against that of most of its trading partners. In this context, the agency believes Romania’s 2011 labour market reform has improved the economy’s flexibility and facilitated the swing toward export-led growth.

At the same time, domestic demand remains subdued, constrained by public-sector spending cuts, modest wage dynamics, and weak investment activity, resulting from banking sector deleveraging and negative credit growth to the private sector, among other things. As of September 2013, credit growth was still negative by slightly more than 3% annually in nominal terms.

In the coming years, Standard & Poor‘s expects the currently low capacity of the government to deploy EU Structural and Cohesion Funds to continue improving, which could lead to an increase in investment activity. It considers that the key deterrents to foreign direct investment (FDI) stem from judicial and bureaucratic uncertainties. With net FDI having declined from an average of 7% of GDP before the 2008-2009 financial crisis to below 2% of GDP per year since 2010, the agency views the government’s progress on making the business environment more transparent and predictable, alongside the reform of state-owned enterprises and judicial reform, as key to how fast the economy can grow. That said, Standard & Poor’s also acknowledges that much of the decline in net FDI flows is linked to the current weak EU economic recovery.

The International Monetary Fund (IMF) agreed to extend a new two-year precautionary Stand-By Arrangement to Romania in September 2013, which combined with the precautionary financial assistance approved by the EU in October 2013 amounts to equivalent of almost €4 billion, while €300 million remain available under a EUR 1 billion World Bank policy loan. Standard & Poor’s views the agreements with the IMF and the EU as a positive development, both to bolster the government’s resolve as it presses forward with its pro-growth structural reforms and to serve as a backstop if Romanian banks’ external rollover rate remains below 100% (as it has since 2010) or if the country’s broader external financing conditions deteriorate.

On the budgetary side, the agency expects authorities to meet their own revised 2013 general government deficit target of 2.6% of GDP this year, despite some revenue underperformance so far and an increase in the discretionary government wage bill. This would represent a consolidation of almost 6.5% of GDP since 2009. It is expected the deficit to decline further in 2014. In light of the fiscal constraints and commitment to meet the budgetary target, the government has in the revised 2013 budget trimmed domestic capital expenditure, which in our view could detract from Romania’s long-term economic growth prospects. On the other hand, the government has increased its budgetary flexibility in case of a faster-than-planned increase in the absorption of EU funds.

Standard & Poor’s also understands that general government arrears have declined substantially and are now mainly at the local government level. Still, it estimates public enterprise arrears at about 2.5% of GDP. A renewed accumulation of government arrears could pose a risk to fiscal consolidation, as would further significant discretionary increases in current spending, such as on the public sector wage bill or other line items. It anticipates that net general government debt will begin to stabilize just below 35% of GDP during 2013-2016 before declining. During the same period, is to expect general government interest payments to represent about 5.6% of general government revenues annually.

Standard & Poor’s believe there is a risk that the Romanian government could deviate from its budgetary and structural reform plans in the run-up to European and presidential elections in 2014. It recognises, however, that Romania benefits from buffers that should help to maintain investor confidence and keep borrowing costs down. These cushions include a flexible exchange rate regime, which helps the central bank pursue an independent monetary policy, foreign exchange reserves that currently exceed short-term external debt by remaining maturity, and potential financial support from official creditors.

Outlook

The positive outlook indicates the estimate that there is at least a one-in-three possibility that Standard & Poor’s could raise its ratings on Romania in the second half of 2014. It could raise the ratings if the planned program of budgetary consolidation, public finance reform, and public enterprise restructuring is implemented in line with our expectations, while keeping external imbalances and financial sector stability in check.

The agency could revise the outlook to stable if – against its expectations and perhaps in the run – up to the 2014 elections -the budget deficits widen significantly or the government pulls back from the restructuring of the public enterprises. The ratings could also come under downward pressure if Romania’s external imbalances re-emerge or if stability in its financial sector weakens.

Source: Standard & Poor’s

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