THE latest plan to solve the debt crisis, according to the FT, is for a tax on banks to raise €30 billion to help with the Greek bailout. Now it is true that banks are very unpopular at the moment, but this seems very much like a case of robbing Peter to pay Paul. It is clear that banks are major holders of government debt, and that, as was noted in the last post, one consequence of a Greek default will be the need for a bailout of the banks. The EU may end up collecting the tax and then handing it straight back again.
Part of the proposal, it seems, is to apply the tax more heavily to those banks that own lots of Greek debt. One presumes that the idea is to make the private sector bear part of the burden of a bailout without the rigmarole of a default (which would force the banks to write down the value of Greek debt). The obvious way to avoid this tax would be to sell Greek debt, but the authorities must be assuming that the banks won't do that, since that would crystallise their losses.But the proposal would surely create a disincentive for banks to own the government debt of other peripheral euro-zone countries. Portugal is still raising some money from short-term debt auctions; why would a bank buy such debt, with all the risks, if it gets taxed as well? The prospect of a tax on bondholders in troubled countries would only increase the pressure to sell once a country (such as Italy or Spain) started to get into trouble.
Then there is the issue of where the tax will apply. Across just the euro-zone? British banks will be delighted at the competitive boost. In all countries in the eurozone? It doesn't seem the right moment to tax Greek banks who own a lot of Greek government debt.
All told, this seems a tortuous idea (a bit like the recent French proposal for a Greek debt swap) to square a very difficult circle. The Greeks can't repay their debts; the Germans don't want to assume the Greek debts in full; and the ECB (and others) are frightened that a Greek default will trigger a Lehman-style financial crisis. This dilemma surely has to be tackled head-on with a Greek debt restructuring that is accompanied by a bank rescue plan.
