The International Capital Market Association says it would devastate the repo market, a vast pawn shop that allows banks to raise funds quickly and easily by pledging assets. It expects transactions to plunge by two-thirds overnight.
Even that may be optimistic. Gabriele Frediani from the electronic market MTS said trades would collapse by 99pc. “The Repo market would disappear overnight,” he said.
The repo market – $8 trillion in the EU and US combined – is a crucial lubricant of global finance. It was a failure of the repo system after the Lehman crash that set off the downward spiral in 2008. \”The collapse of the repo market contributed to a liquidity shock that had far-reaching consequences for the global financial system,\” said an IMF study.
ICMA says that much of the current collateral system for banks will \”cease to be viable\” under the current plan. Investors will be driven into \”unsecured deposits\” not covered by the tax. The European Central Bank would struggle to conduct monetary policy.
I know, roughly that is, what the repo market is. I do wonder though whether any of those who support the RHT do.
Back when I wrote a report on the RHT I pointed to the Interbank or overnight market a being threatened with shut down as a result of the tax. The tax itself would be more than the interest to be earned. Seems to same is true of the repo market but squared: as it has become obvious that they way it is calculated is that every step and stage pays it. Even something as simple as an overnight loan or repo, pays it both coming and going. with no market maker or broker exemptions.
Between the two of them these are the two main sources of short term liquidity in the markets. At least I\’m told so.
Shutting them down does seem a little odd really.