Watching capital flow

The government’s decision to impose a 7-percent tax on repos yields creates a new environment that can affect capital flows in Greece’s capital markets. The demand for the reimposition of a tax on repos – taxed at 15 percent from 1995 to 1998 – had been widespread among brokers and other market players, who hoped that it would provide an incentive to savers, investors and also businessmen to re-engage in more productive investments, such as the stock market. Stung by the steep decline of the Athens Stock Exchange since September 1999, many of the above preferred the safe haven of repos. Now, it is hoped they will seek better returns on their money in other investment instruments. At present, interest rates on repurchase agreements range between 3.15-3.20 percent for two-week contracts, and 3-3.15 percent for monthly ones. This means that if interest rates remain unchanged, repos yields will drop to 2.79-2.98 percent from January 2002, when the new tax kicks in. Therefore the yield difference in favor of repos, compared with other money market instruments such as time deposits, income mutual funds and synthetic swaps, will become insignificant. This is exactly the purpose of the tax, to redress this imbalance. Even before the imposition of a tax, repos appeared to be leveling off, or even dropping slightly, following their spectacular expansion. According to Bank of Greece data, sums invested in repos fell in August for the first time in 2001 (52 billion drachmas less compared to the previous month). This fall continued in the following months. Ever since they were introduced at the end of the 1980s, repos have known spectacular ups and downs, always in conjunction with whether they were taxed or not. Initially tax-free, repos attracted increasing amounts of capital until, at the end of 1993, 2.6 trillion drachmas had been invested in repos. Then the incoming socialist government decided to impose a 15-percent tax on interest, the same as the tax on savings accounts. This started repos on a downward slope until, by the end of 1997, their presence in the Greek money market had become largely symbolic – only 36.7 billion drachmas were invested in repos. The abolition of the tax early in 1998 started a new golden period for repos, which were not affected by declining rates. If anything, the bear market that began in 1999 accelerated investors’ preference for repos: By August 2001, the value of repurchase agreements was 10.7 trillion drachmas, a rise of over 29,000 percent in just over three and a half years. The fact that many more people have turned to repos during the past two years, despite the decline in interest rates, shows that the yield reduction achieved by the tax is not itself sufficient to make the public seek out a more active management of their money. Market developments, investor psychology and expectations are some of the main factors influencing the choices of savers and investors. The current improvement in international stock and bond markets may provide the impetus for a change in investment strategies. Market professionals told Kathimerini that taxation was a step in the right direction. Evangelos Memos, deputy manager of Agricultural Bank’s mutual funds arm, estimates that share and bond funds will provide the main alternative for those seeking a higher return on their money. He believes that about 20-30 percent of the current sums invested in repos will be invested on the Athens Stock Exchange. Vassilis Haralambidis, managing director of BX Financial Services believes that the tax could spur productive investments and business activity if combined with more structural and tax reforms. He also believes that raising taxes on real estate would also help create a more rational market and increase productive investments. As for the gains expected by the stock market, Haralambidis says that 30-35 percent of investments in repos could be directed towards the ASE, but he does not foresee such a massive infusion unless the general index, currently below 2,800 points, rises to the 3,300-3,500 level. Giorgos Efstratiadis, head of capital management at Marfin brokers, remarked that while the taxation of repos was a step in the right direction, it was not enough by itself. A continuation of tax reforms, positive developments in the domestic and international economy and improved investor psychology was also needed. The next step, he felt, was uniform taxation of savings.