March 19, 2013

The Fed commented on a deposit tax in 1941:

In our opinion, however, your proposal is not in accord with one of the fundamental principles of taxation in a democracy, namely, that taxes should be imposed in accordance with ability to pay. Under your proposal deposit holders would be taxed on the number of dollars deposited by them. A small business man, for instance, who earns a moderate income may have a very active deposit account which reflects the whole volume of his business transactions rather than his net profits. His deposit tax might exceed that of an individual who is much better off but whose only deposits consist of salary or dividend checks. An equitable tax would bear more heavily on the latter than on the former.

It is this rather simple argument that puts paid to this apology for the Cyprus tax:

Ultimately, taxing bank deposits (or, as Caroline Baum at Bloomberg View says, “confiscating” them) has many of the same effects as a currency devaluation. Whether the devaluation happens overnight, as it did in Argentina in 2002, or over an extended period of inflation, the ultimate hit to savers of all kinds is the same as a tax on deposits.

This is totally nonsensical. The ultimate hit to savers by devaluation or inflation is not even close to the effects of a deposit tax – because a deposit tax is not a wealth tax. Bond holders get off scot-free with a deposit tax. So do stock-holders. So do real estate owners. So do … the list is endless.

However, there are now concerns about banks’ senior debt:

Europe’s unprecedented tax on Cyprus bank deposits is raising concern among holders of senior bank bonds that they’ll be made to take losses should another country need rescuing.

The Markit iTraxx Financial Index of credit-default swaps insuring senior debt of 25 banks and insurers rose as much as 19 basis points to 162 basis points yesterday, according to prices compiled by Bloomberg. That’s the biggest jump since Aug. 2, before the European Central Bank steadied markets by announcing its bond-buying program, and the gauge is now at the highest in more than two weeks.

As noted yesterday, Russia is most upset about the Cypriot deposit tax. Here’s why:

Wealthy Russian individuals do not, as a rule, keep their private fortunes in Cypriot banks. They prefer stronger financial institutions or less transparent jurisdictions. Yet Russian corporations have used Cyprus extensively since the 1990s. The island uses English law, convenient for settling disputes. The corporate tax, at 10 percent, is among Europe’s lowest. Nonresidents’ dividends are exempt from withholding tax. The authorities have always been pro-business and, according to people conducting their affairs in Cyprus, willing to turn a blind eye when necessary.

As a result, in the third quarter of 2012 (the last period for which data from the Russian Central Bank are available), Cyprus was Russia’s second biggest source of foreign direct investment after Luxembourg. Since 2007, more than $114 billion has flowed into Russia from the small Mediterranean nation, practically all of it Russian money paid as dividends by Cyprus- registered holding companies and reinvested into Russian production assets. Much of that money comes into Russia in the form of loans, an approach that minimizes corporate taxes. All of Russia’s big metals exporters and its biggest independent natural gas producer, Novatek, have corporate structures and bank accounts in Cyprus.

However, Cyprus has told the EU to go experiment somewhere else!

Cyprus’s parliament rejected an unprecedented levy on bank deposits, dealing a blow to European plans to force depositors to shoulder part of the country’s rescue in a standoff that risks renewed tumult in the euro area.

Cypriot legislators in the capital Nicosia voted 36 against to none in favor of the proposal in a show of hands today. There were 19 abstentions. Hammered out by euro-area finance chiefs over the weekend, the deal had sought to raise 5.8 billion euros ($7.5 billion) by drawing funds from Cyprus bank accounts in return for 10 billion euros in international aid.

Outside, the parliament was surrounded by demonstrators singing the national anthem and chanting “this will not pass.” The crowd cheered when the results of the vote came through.

The euro declined 0.6 percent to $1.2878 as of 7:47 p.m. in Frankfurt. The Stoxx Europe 600 Index (SXXP) dropped 0.4 percent, the third straight drop. Spanish 10-year bonds fell for a fifth day, with the yield climbing 8 basis points to 5.03 percent.

You’ve heard of Helicopter Ben? He’s got competition from Akrotiri Osbourne:

The U.K.’s Royal Air Force is flying 1 million euros ($1.3 million) to Cyprus for military personnel stationed on the island to ensure they don’t run out of cash.

The move came after Chancellor of the Exchequer George Osborne said two days ago that the U.K. will compensate military and civilian personnel in Cyprus who lose out as a result of the European Union’s levy on deposits in Cypriot banks to fund a rescue package for the indebted nation.

An RAF flight left for Cyprus this afternoon with 1 million euros on board as a contingency measure to provide military personnel and their families with emergency loans in the event that cash machines and debit cards stop working completely,” the Ministry of Defence in London said in an e- mailed statement today. “We will keep this under review and consider further shipments if required.”

Here in Canada, there is unprecedented federal micromanaging:

Manulife Bank has reversed its move to cut the mortgage rates it offers home buyers after a rebuke from the federal Finance Ministry, The Globe and Mail has learned.

"After consulting with the Department of Finance, Manulife Bank has withdrawn the promotional campaign and reverted to our previous posted rate,” a spokesperson for Manulife Financial Corp. said in an e-mailed statement.

The Globe and Mail reported Tuesday that Manulife had cut its rate for five-year fixed mortgages to 2.89 per cent from 3.09 per cent, part of a move by lenders to drive down rates to attract home buyers in the spring selling season.

A spokesperson for Finance Minister Jim Flaherty said an official from the Minister’s office contacted Manulife Monday evening to express concern with the rate cut.

The spokesperson said Mr. Flaherty was not happy with Manulife’s decision, and felt the move was unacceptable.

I hadn’t realized that one problem with US student loans was idiotic collection incentives:

The law mandates no minimum payment for a borrower to enter a rehabilitation program, and collection companies may take borrowers’ finances into account.

Yet, under the old contract, the companies received a much higher commission if borrowers made a minimum payment of 0.75 percent to 1.25 percent of the loan each month, depending on its size.

For example, a $20,000 loan would require payments of about $200 a month for the collection company to get its full commission. Then, the collector would receive 16 percent of the loan amount — or $3,200. If the payment fell below that figure, the collector got an administrative fee of $150.

That differential provided an incentive for collectors to insist on the amount triggering the commission and fail to tell borrowers they could pay less, Yu said. Under the new contract, borrowers with high debts and low incomes could get back on track while making payments of as little as $5 a month, while collectors could still make their commission.

It was a mixed day for the Canadian preferred share market, with PerpetualPremiums off 2bp, FixedResets roaring ahead by 25bp and DeemedRetractibles up 8bp. Volatility was good and uniformly positive; dominated (as might be expected given the returns) by FixedResets. Volume was high.

HIMIPref™ Preferred Indices
These values reflect the December 2008 revision of the HIMIPref™ Indices

Values are provisional and are finalized monthly
Index Mean
(at bid)
Mod Dur
Issues Day’s Perf. Index Value
Ratchet 0.00 % 0.00 % 0 0.00 0 1.4534 % 2,647.0
FixedFloater 4.09 % 3.44 % 30,802 18.40 1 0.6508 % 3,971.7
Floater 2.52 % 2.82 % 88,564 20.19 5 1.4534 % 2,858.1
OpRet 4.81 % 2.17 % 60,142 0.28 5 -0.0387 % 2,603.0
SplitShare 4.29 % 4.08 % 701,708 4.20 4 -0.0561 % 2,936.6
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 -0.0387 % 2,380.2
Perpetual-Premium 5.20 % 1.72 % 89,800 0.56 31 -0.0181 % 2,361.6
Perpetual-Discount 4.77 % 4.85 % 163,734 15.78 5 0.0406 % 2,663.1
FixedReset 4.89 % 2.56 % 293,326 3.29 80 0.2468 % 2,513.9
Deemed-Retractible 4.87 % 3.26 % 138,394 0.60 44 0.0802 % 2,446.8
Performance Highlights
Issue Index Change Notes
PWF.PR.A Floater 1.04 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-03-19
Maturity Price : 24.00
Evaluated at bid price : 24.25
Bid-YTW : 2.15 %
IAG.PR.G FixedReset 1.21 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2017-06-30
Maturity Price : 25.00
Evaluated at bid price : 26.77
Bid-YTW : 2.52 %
SLF.PR.I FixedReset 1.24 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2016-12-31
Maturity Price : 25.00
Evaluated at bid price : 26.88
Bid-YTW : 2.14 %
VNR.PR.A FixedReset 1.38 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2017-10-15
Maturity Price : 25.00
Evaluated at bid price : 27.12
Bid-YTW : 2.57 %
BAM.PF.B FixedReset 1.39 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-03-19
Maturity Price : 23.29
Evaluated at bid price : 25.60
Bid-YTW : 3.73 %
TRI.PR.B Floater 4.65 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-03-19
Maturity Price : 24.07
Evaluated at bid price : 24.33
Bid-YTW : 2.12 %
Volume Highlights
Issue Index Shares
CU.PR.F Perpetual-Discount 445,736 New issue settled today.
Maturity Type : Limit Maturity
Maturity Date : 2043-03-19
Maturity Price : 24.56
Evaluated at bid price : 24.95
Bid-YTW : 4.51 %
NA.PR.Q FixedReset 90,857 Nesbitt crossed 81,000 at 26.35.
Maturity Type : Call
Maturity Date : 2017-11-15
Maturity Price : 25.00
Evaluated at bid price : 26.32
Bid-YTW : 2.68 %
MFC.PR.J FixedReset 63,100 Nesbitt crossed 48,500 at 26.21.
Maturity Type : Call
Maturity Date : 2018-03-19
Maturity Price : 25.00
Evaluated at bid price : 26.20
Bid-YTW : 2.97 %
FTS.PR.J Perpetual-Premium 57,100 Nesbitt crossed 50,000 at 25.75.
Maturity Type : Call
Maturity Date : 2021-12-01
Maturity Price : 25.00
Evaluated at bid price : 25.70
Bid-YTW : 4.42 %
TRP.PR.D FixedReset 53,824 Recent new issue.
Maturity Type : Limit Maturity
Maturity Date : 2043-03-19
Maturity Price : 23.32
Evaluated at bid price : 25.72
Bid-YTW : 3.48 %
PWF.PR.S Perpetual-Discount 50,208 Recent new issue.
Maturity Type : Limit Maturity
Maturity Date : 2043-03-19
Maturity Price : 24.68
Evaluated at bid price : 25.08
Bid-YTW : 4.80 %
There were 46 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
W.PR.J Perpetual-Premium Quote: 25.53 – 26.00
Spot Rate : 0.4700
Average : 0.3392

Maturity Type : Call
Maturity Date : 2013-04-18
Maturity Price : 25.00
Evaluated at bid price : 25.53
Bid-YTW : -7.92 %

TCA.PR.X Perpetual-Premium Quote: 51.22 – 51.60
Spot Rate : 0.3800
Average : 0.2670

Maturity Type : Call
Maturity Date : 2013-10-15
Maturity Price : 50.00
Evaluated at bid price : 51.22
Bid-YTW : 2.60 %

HSB.PR.D Deemed-Retractible Quote: 25.76 – 26.08
Spot Rate : 0.3200
Average : 0.2259

Maturity Type : Call
Maturity Date : 2013-04-18
Maturity Price : 25.50
Evaluated at bid price : 25.76
Bid-YTW : -9.35 %

ELF.PR.H Perpetual-Premium Quote: 26.15 – 26.40
Spot Rate : 0.2500
Average : 0.1745

Maturity Type : Call
Maturity Date : 2021-04-17
Maturity Price : 25.00
Evaluated at bid price : 26.15
Bid-YTW : 4.98 %

PWF.PR.R Perpetual-Premium Quote: 26.80 – 27.04
Spot Rate : 0.2400
Average : 0.1648

Maturity Type : Call
Maturity Date : 2021-04-30
Maturity Price : 25.00
Evaluated at bid price : 26.80
Bid-YTW : 4.56 %

GWO.PR.M Deemed-Retractible Quote: 26.42 – 26.65
Spot Rate : 0.2300
Average : 0.1643

Maturity Type : Call
Maturity Date : 2015-03-31
Maturity Price : 26.00
Evaluated at bid price : 26.42
Bid-YTW : 4.66 %

One Response to “March 19, 2013”

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