In moves that will be watched around the world by cash-starved governments, there are reports the Greek and British governments are eying special taxes on the bank profits to help boost income and reduce debt bills.
The news has already sent Greek shares sharply lower and reports of a similar approach in London will have the same impact unless denied. Overnight there was no sign of that happening in London.
The move by new Greek government is considered to be more advanced given the sudden realisation by the new government of just how bad the country’s finances are.
Greece’s finance ministry said on Friday that it’s considering imposing a one-off tax on profits from banks and other companies to reduce the budget deficit.
It confirmed reports in Greek newspapers suggesting the tax, plus higher taxes on dividends and taxes on short-term capital gains. The news saw National Bank of Greece, the country’s biggest lender, fall 3.6% on Friday and the overall market 2.2%.
New Prime Minister George Papandreou had earlier said the country’s finances were in a state of emergency and the ballooning budget deficit needed urgent reforms and the state had to have cost cuts.
“We are in a state of emergency and everybody must realise that,” Papandreou told parliament in an inaugural address after his socialist Pasok party won elections on October 4. “The situation of our economy is explosive … we face a derailment of public finances without precedent,” he said. The budget deficit is between 6% and 10% of GDP, debt is close to 100% of GDP (depending who you believe), the economy is still on the brink of recession, unemployment is rising.
He said a new budget will be tabled in parliament in a few days.
In London the Sunday Telegraph reported the tax on bank profits would be a way of forcing the financial groups to pay fore the taxpayer-funded bailout.
The paper said the move could include a one-off “windfall” tax on profits and forcing the banks to pay more corporation (company) tax by reducing their ability to offset losses against tax over several years.
The paper pointed out that it wouldn’t be the first time this move has been done in the UK.
Back in 1981, the government of Margaret Thatcher imposed a windfall tax on banks
“Then the government imposed a £400 million ($A714.4 million) special levy on the clearing banks, which were the only part of the economy not suffering from the recession.
“The banks had to pay 2.5% of their non-interest bearing current account deposits — which in the end amounted to 19% of their 1981 profits.”
In 1997 Labour imposed a windfall profits tax on newly privatised utilities. That was opposed by the Conservatives, who look likely to win next year’s UK poll.
The news comes as high-flying executives of big banks in the UK join their US counterparts in being paid huge bonuses because of the big trading profits they are making at the moment, courtesy of ultra cheap money from central banks and taxpayers.
Goldman Sachs and JPMorgan have set aside billions of dollars this year for huge bonuses to staff around the world, not just in the US. US papers have reported that Goldman Sachs’ 5500 bankers in London would be paid more than $A700,000 each.
And the Sunday Times reported that some of the UK’s biggest banks, including the state controlled Royal Bank of Scotland, are planning to defy government pressure and will make big bonuses payments to senior staff.
“THE state-owned Royal Bank of Scotland is planning to hand out record bonuses of up to £5 million each in a snub to struggling taxpayers.
“The average employee in its high-risk investment banking arm is likely to take home £240,000, with the top 20 staff in line for payments of between £1 million and £5 million.
“The payouts by the investment banking division — from a total pay and bonus pot of £4 billion — would top the deals awarded at the peak of the financial boom in 2007 and are 66% higher than those paid last year.”
The Times also reported that Barclays bank is “on track to post record profits of more than £10 billion for 2009, triggering multimillion pound bonuses for dozens of traders and executives.
“Bob Diamond, the president of Barclays who was paid more than £20 million in 2007, is believed to be in line for a huge payout for leading the bank’s acquisition of Lehman Brothers’ operations in the US.
This news will soften the way for any assault on the banks’ trading profits by the cash-starved UK government.
Meanwhile, in Ireland, a senior government minister has raised the spectre of the country being forced to go to the IMF for aid if it can’t make deep cuts in spending.
“A senior Irish minister has for the first time warned Ireland could be forced to go to the IMF for help if the country cannot implement the necessary cuts in the December budget.
“The bleak assessment by Mary Harney, health minister, and former deputy prime minister, was one of several ministerial warnings on Friday choreographed to bolster public opinion for what is set to be harshest budget in the country’s 88-year history.
“Mrs Harney, a leading economic reformer, said: “We’re spending €500 million a week more than we’re raising. That’s an unsustainable situation.
“If the government hasn’t the capacity to do what’s needed, then others will come in like the IMF and overnight they will make decisions.”
We are not in the same mire as these governments (Italy and Spain are just as desperate). But you’d the threat of a bank profits tax might bring the Big Four banks into line very quickly?