TAX NEWS - June 2010

France, Germany Seek Global Pact on Financial Market Tax

PARIS — The French and German governments Monday reiterated calls for an international agreement on a tax on financial transactions and a levy on financial institutions in a joint letter to Canadian Prime Minister Stephen Harper.

Ahead of the meeting of the Group of 20 industrial and developing nations in Canada this week, French President Nicolas Sarkozy and German Chancellor Angela Merkel said both countries are also in favor of stricter regulations for over-the-counter derivatives and credit-default-swap markets.

Canada has rejected calls to establish a tax on the world's largest financial institutions.

Mr. Sarkozy's and Ms. Merkel's stance echoes a letter they sent last week to European Commission President José Manuel Barroso urging the rapid establishment of stricter controls of markets in sovereign CDS and short-selling. CDS are tradable, over the counter derivatives that function like a default insurance contract for debt. If a borrower defaults, the protection buyer is paid compensation by the protection seller. Swap buyers may be protecting investments they own or simply making bearish bets against companies or countries.

The leaders of France and Germany have taken several steps this month to mend frayed relations after the debt crisis in Greece and other parts of Southern Europe exposed deep differences between Berlin and Paris on economic policy and on the future shape of Europe.

Last week, Mr. Sarkozy and Ms. Merkel met in Berlin to seek compromise. Ms. Merkel agreed that Europe needs more integrated "economic government" — a French phrase that Germany has long resisted — while Mr. Sarkozy accepted that such coordination should take place mainly at the level of the 27-country European Union, and not, as France has insisted up to now, among the smaller circle of 16 countries that share the euro.

In their letter to Mr. Harper, Mr. Sarkozy and Ms. Merkel called for new financial-market rules to be in place by the end of 2012 and urged the Financial Stability Board, the body that coordinates at the international level the work of national financial authorities, to publish by the end of 2010 a list of financial centers that refuse to conform to international rules.

They also backed the publication of tests on banks' financial health, which is expected to take place in Europe in the second half of July.

"Recent turbulence has shown that more needs to be done to ensure financial stability," Mr. Sarkozy and Ms. Merkel said.