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FTT backers fear tax will harm Europe's financial system
Fundamental legal concerns and fears over costs are a major obstacle among the 11 countries that have agreed to pursue a European Union financial transaction tax, leaked documents have revealed.

In an unexpected boost for Britain's challenge in the EU courts to the FTT, an internal Brussels memorandum has exposed major problems with the tax among the participating countries.

The six-page document, discussed at a meeting between European Commission and civil servants from the 11 EU member states last week, raised a number of serious question about the sideeffects and workings of the FTT.

Amid worries about double taxation and collection of the levy, the secret "non-paper" raises detailed concerns at the cost to governments of issuing bonds and fears that Europe's financial system will be damaged by the tax.

The paper, dated 16 April, warns that the FTT could snuff out the bond repurchase market by imposing a heavy cost burden on "repo" operations that involve high volumes of transactions.

"The tax will induce an additional cost that is not sustainable for the market participants," warned the document.

"Repo operations are very useful for managing the treasury liquidity, and the disappearance of this market combined with the lack of viable alternatives will induce serious problems about risk management. The extinction of the market will negatively affect the sovereign bonds market and by consequence will rise the government funding costs."

While the FTT will not be charged on primary issuance of bonds, it will be imposed when markets subsequently buy and sell securities increasing the costs of borrowing for vulnerable countries such as Italy and Spain.

The memorandum continues to warn that businesses as well as governments will suffer with "both higher financial costs on the real economy and financial stability issues".

"Business have expressed worries that the same effect for government bonds would replicate on the corporate issuers, with negative effects on the financing capability of companies," said the paper.

Last week, Britain launched a legal challenge to the FTT, a 0.1 per cent levy on the value of financial transactions and 0.01 per cent on exchanges of derivatives, over fears it will damage the City of London.

"The memo shows that the UK, Sweden and others are absolutely right to raise concerns about the way the tax is drafted at the moment," said Mats Persson, the director of Open Europe, which leaked the documents.

The commission, which drafted the FTT proposal, played down the concerns as "very normal". "We will be replying in detail to the issues they have raised and expect that we will be able to allay many of their concerns," said a statement.

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