A week ago the German finance minister, Wolfgang Schäuble, wrote in a spirited Financial Times opinion piece of the need for a “two-step” approach to European banking union.

Given the complexities around the three pillars of that union – a single supervisor, a single resolution regime for broken banks and a single deposit guarantee system – we should all resign ourselves to a longer period to reach a “steel-framed” set-up, he wrote.

In the meantime we should build an interim framework – by which he meant we should make do with a hotchpotch of national solutions, albeit under the auspices of European Central Bank regulation from mid-2014.

Mr Schäuble is right not to want to rush things and repeat the mistakes made with the impetuous creation of the region’s single currency 14 years ago.

But the focus of European policy makers on the design of a forward-looking banking union – over whatever timeframe – misses a crucial point. There is a crisis in parts of the eurozone banking system that must still be addressed.

Take Portugal. As the Financial Times reported on Monday, there is deep nervousness among bank bosses there over the change in European leaders’ tone towards the southern periphery of the eurozone amid the recent crisis in Cyprus.

Their concerns are understandable. Though Portugal and its banks have benefited from an initial bailout programme, the deepening recession that has followed has left the banking sector on a knife-edge. Only if the economy recovers in line with optimistic forecasts are the banks likely to recover completely without needing further assistance.

As ever, there is voluble – and understandable – protest from within the banks that the terms of their first bailouts were both punishing and counter-productive. More fundamentally, with unemployment at 17 per cent and rising, and GDP still shrinking, banks’ loan defaults can only worsen. More than 10 per cent of corporate loans are already non-performing, up by a third in a year.

Though Portugal is far from unique across the eurozone periphery – the banking systems of Spain, Italy, Ireland and Greece are hardly thriving – it could well be the next cause for alarm.

It is solidly propped up in liquidity terms, thanks in large part to €50bn of funds from the ECB, so there is no immediate cause for concern. But capital levels are hardly rock solid despite relatively high headline ratios of up to 15 per cent for the three main lenders. Once the definitions of the incoming Basel III rule book are applied, there is no margin for error if loan losses keep rising beyond the hoped-for end of year turning point.

If the economic situation does worsen, Portugal’s banks have no obvious route to fresh money. Deutsche Bank’s €2.9bn recent capital raising gave the sector some confidence that there is investor appetite for bank equity. But backing a big German bank with global operations is a far cry from backing a Portuguese lender anchored to the domestic market.

By focusing too much on the future, Europe is in danger of ignoring the risks of the present

BPI, which is still profitable, is in a slightly stronger position than Portugal’s other two big banks, but without a recovery in the underlying market no one can thrive. If the country’s lenders hit more trouble, there will be potentially profound implications for other parts of the eurozone periphery, and the whole region’s growth prospects, especially if European policy makers maintain their determination to appear tough.

There is understandable nervousness that Cyprus will be taken as a template for toughness. And indeed one prospect seems set in stone – the haircutting of bondholders would almost certainly be repeated in any future bank failure, as happened both in Cyprus and with Dutch bank SNS Reaal.

But if European authorities want to stem any risk of widespread eurozone panic, they need to do three things now.

They should make explicitly clear that no future bailout would involve haircutting depositors as it did in Cyprus.

More concretely, they must free up access to the European Stability Mechanism so that any banks unable to find necessary capital under their own steam can be recapitalised without involving national governments.

And crucially, they need to keep on top of the state of the eurozone’s weakest banks. The European Banking Authority announced last week that it would delay a repeat stress test until 2014 to involve the ECB. That might fit with Mr Schäuble’s measured timetable for fully fledged banking union. But by focusing too much on the future, Europe is in danger of ignoring the risks of the present.

Patrick Jenkins is the Financial Times’ banking editor

Nearly five years after the collapse of Lehman Brothers, the US investment bank, financial services companies are still battling to restore their reputation.

Just as one crisis passes another seems to arise, whether it be the scandal over manipulation of Libor rates, the continued outcry over bankers’ pay, the mis-selling of payment protection insurance, reverses suffered by small business thanks to interest-rate swaps, or the downgrade to junk status of the Co-operative bank – to list a few.

Given the number of misdemeanours it is almost surprising that a quarter of the names that made it to the BrandZ Top 100 Most Valuable Global Brands ranking carried out by Millward Brown Optimor are banks, insurance companies or credit cards.

Contrary to expectations, financial brands also gained, on average, 20 per cent compared with 7 per cent for the top 100 as a whole in the past year.

Citi, the Commonwealth Bank of Australia and even Barclays were among the top risers in 2012 at 37 per cent, 36 per cent and 34 per cent respectively.

Barclays is perhaps the most surprising, given there were protests both inside and outside its annual general meeting last month.

Not only was the bank’s management lambasted over big bonuses, tax avoidance and speculation on food prices, but also last July Bob Diamond was forced to resign as chief executive in the wake of the Libor scandal.

Anastasia Kourovskaia, vice-president at Millward Brown Optimor, says companies such as Barclays benefit from their strong branding, which helps to protect them during crises.

“The strong brands have outperformed by a country mile,” she says.

“If you have a strong brand it protects the business during a crisis and allows you to emerge much stronger than the competition.

“This is more important for financial institutions than it is for most brands because, if you manage a crisis well, the stock market will remain stable and some consumers will see the news as irrelevant to their decisions. It depends very much on how the news is managed as to whether they pay attention to it.”

Barclays also gained from its international expansion. Controversies that played in Britain, its home country, have not necessarily tarnished its reputation abroad. Meanwhile, it was able to grow aggressively in the US.

HSBC was the leader among the global banks, rising 24 per cent in the year, partly as a result of expansion in Latin American and Asian markets where it has established itself as a leading player. Its advertising slogan – “the world’s leading local bank”, as featured in airports and on television worldwide – has proved a resounding success.

Citi, too, has benefited from a successful advertising campaign. It celebrated its 200th anniversary last year with an extensive campaign, including photos, videos and Facebook apps that celebrated human progress over the past two centuries. Its efforts paid off, with a 37 per cent rise in brand value – the strongest next to Barclays.

The growth in brand value is all the more important given that banks face new threats, including competition from online upstarts, retailers and alternative brands such as PayPal.

Ms Kourovskaia says this is particularly true in the case of young people who are among the most willing to embrace digital channels and who, therefore, make it more difficult for banks to manage their wealth.

“Banks have lost a lot of trust and, although there’s a significant pick-up in financial performance, there is increasing pressure from alternative brands.

“The gap between banks and retailers in terms of trust has shrunk. Twenty years ago it would have been unthinkable to bank with a retailer but that’s no longer the case.”

Credit cards have done a particularly good job of expanding in the face of banks’ weakness.

Visa rose by a handsome 46 per cent as a result of an outstanding financial performance and its sponsorship of the London 2012 Olympic Games.

Amex expanded in Latin America and rose 16 per cent up the rankings.

MasterCard has also made inroads into developing markets and prospered from its hugely successful advertising campaign. This featured families in “priceless” activities such as a baseball game, before concluding: “there are some things in life money can’t buy. For everything else, there’s MasterCard.”

Although the global financial services brands have grown more quickly in the past year, regional banks, too, have been expanding their brand power internationally.

There has also been consolidation in emerging markets, with several Chinese banks, for example, buying assets outside China, though not always rebranding them.

The China Construction Bank, the Bank of China and Agricultural Bank of China have all moved between 10-12 per cent higher up the rankings. This leaves them listed among the top 10 regional banks at numbers three, nine and four respectively.

Despite their continued resilience, banks need to tread cautiously, though, says Ms Kourovskaia.

“Banks seem to be doing okay financially, but the financial services universe has grown dramatically and banks are getting a smaller piece of it because of that erosion of trust,” says Ms Kourovskaia.

“They could have captured a larger chunk of consumers’ wallets if they had had that,” she adds.

“It’s not how good they are. It’s how good they could be.”

Goldman Sachs is selling its remaining stake in Industrial and Commercial Bank of China, exiting an investment that has made more than $7.3bn for the US investment bank, its private equity funds and some senior partners.

Goldman was offering its less than half a per cent of the Chinese bank – the world’s biggest by market value – at HK$5.47-HK$5.50 per share on Monday evening in Hong Kong, according to people familiar with the sale. That is a slight discount to the closing share price of HK$5.64.

The sale, raising about $1.1bn, completes the sale of an investment made in 2006 when Goldman bought into ICBC for $2.58bn several months ahead of its Hong Kong initial public offering. It will have sold down its holding in six separate transactions, realising a total of $9.9bn.

The bank has never revealed how much of the stake it owned directly and how much was owned by its third-party private equity funds and the senior partners who were allowed to buy shares alongside the group.

The value of the stake would have been marked at an even higher value on Goldman’s books in January when it made its last sale – the shares were trading then at HK$5.95.

The main reason behind the sale is to prepare for changes to bank capital regulations, which make owning equity in another financial institution significantly more expensive, according to people familiar with the US group.

However, ICBC’s stock has seen large price swings in the past few years, which Goldman has always marked into its profit and loss account, leading to big swings in its own earnings. Last year, valuation changes boosted Goldman’s income by $408m, but the year before they cost it $517m, dragging its broader Asia-Pacific earnings into an overall loss.

The largest single chunk of its stake was the $2.3bn worth of shares sold to Temasek, the investment arm of the Singapore government, in 2011. The rest has been sold in smaller chunks to the wider market.

ICBC has been the most aggressive of the Chinese banks in expanding overseas, which has helped it grow into the world’s biggest bank. It has operations in the US and a stake in Standard Bank of Africa, as well as businesses in Latin America and elsewhere in Asia.

As its holding in ICBC is below 5 per cent of the company, Goldman does not have to disclose the size of its remaining stake. A spokesman for Goldman declined to comment on the share sale. ICBC had no immediate comment.

Additional reporting by Simon Rabinovitch in Beijing

It is four years almost to the day since Nader Shenouda and Asar Mashkoor walked into the offices of Panmure Gordon in London’s Moorgate and signed a £23m cheque to buy a 44 per cent stake of the venerable British broker. The two men – the duo then in charge of Qatari investment fund QInvest – saw it as a lucrative chance to buy into a City of London institution. Not only were they getting a bargain; they were also entering a business that would allow them to tap into a rich flow of acquisition deals and company flotations.

It didn’t really turn out that way. Panmure’s shares – acquired for 34p a share – are now trading at just 15p. If the raw investment logic floundered, so did the broader strategic plan. The Qataris bought the stake just as UK dealflow had begun to seize up.

But the Panmure bet – among the lowest profile of Qatar’s investments of recent years – has arguably been the exception to a more promising rule. The gas-rich emirate’s various funds, mainly Qatar Investment Authority and its direct investment arm Qatar Holding, have spent the years of the financial crisis snapping up stakes in big banks around the world. “Banks were distressed. The Qataris are buyers of distressed assets,” explains a banker at one such distressed institution.

For an outlay of several billion dollars, they now command highly influential stakes in two established western banks (Barclays and Credit Suisse) and a trio of fast-growing Bric lenders (Agricultural Bank of China, Santander Brasil and, as of this week, Russia’s VTB). There are also other fringe bets, from Egypt to Greece.

In pure economic terms, the best that could be said of the emirate’s big bank stakes is that results have been mixed.

It is impossible to pin down precise performance for any of them because of limited disclosures. However, it is clear that the biggest success has been the emirate’s £2.3bn investment in Barclays in 2008. Barely a year later, Qatar Holding crystallised a £1.4bn gain through converting warrants that were attached to the shares. Today, the Qataris are still sitting on a shareholding of about 10 per cent, worth £320m more now than it was five years ago. The ongoing criminal investigation into Barclays’ alleged failure to disclose certain information in this regard is the only fly in the ointment.

Agricultural Bank of China has also performed satisfactorily – its share price is almost unchanged since Qatar invested alongside the lender’s initial public offering three years ago.

However, the story of the Credit Suisse investment is less edifying. Having bought into the stock for an estimated $5bn when the bank’s share price was about SFr60, Qatar’s stake is now worth less than half that, though the blow is cushioned by high coupons on several billion dollars of additional contingent capital. There are latent losses, too, on the Santander Brasil investment – made via high-yielding convertible bonds three years ago, but with a conversion price that is nearly 60 per cent above the current share price.

“Their grand strategy is always to generate yield, with downside protection,” says Ken Costa, a veteran investment banker who has advised on several of Qatar’s big UK deals.

Investment performance is only part of the story, though. For the Qataris, buying stakes in banks – unlike investing in other kinds of companies – is about the secondary purpose of securing a trusted and beholden route to other potential investments.

For the Qataris, buying stakes in banks – unlike investing in other kinds of companies – is about the secondary purpose of securing a trusted and beholden route to other potential investments.

“They always want deal flow,” says one Credit Suisse executive who has seen the way the bank interacts with the Qataris. “It’s a quid pro quo for having them as an investor.”

At the same time there has been a third purpose to the bank investments, say those who have worked closely with the Qataris – education. As the emirate and its funds evolve fast into some of the most influential investors in the world, there is a recognition that there is a need to improve the level of homegrown financial sophistication, rather than rely, as used to be the case, on imported expertise.

“They’ve been getting rid of [foreign] managers and running it themselves,” says Tim Linacre, a corporate adviser and former Panmure chief executive. “There’s a meritocracy among the families. The brightest thrive. They are US and UK educated. The next generation is driven to make a success of it.”

Part of that mission has been achieved simply by having the best Qatari executives go abroad to learn their trade. Tamim Al-Kawari, for example, who now heads QInvest, previously worked at Goldman Sachs and latterly headed the US bank’s Qatari business.

The poaching is not necessarily unwelcome – western banks may be rewarded with lucrative advisory mandates if good relations are maintained.

At the same time, the emirate has been operating a strategy of using bank board positions creatively – not only to represent investment interests but also to imbibe western banking expertise.

Credit Suisse insiders point to Jassim Bin Hamad J.J. Al Thani, the 30- year-old son of the prime minister, who is both the chairman of QInvest and the Qatari representative on the Swiss bank’s board. “It’s an education for him,” says one banker who has observed the prince at close quarters. “He just sits there and absorbs.”

Bankers are convinced that process will cement Qatar’s strategic strongholds at banks across the world – further underpinning seemingly insatiable appetite for deals. It is a far cry from that £23m investment in Panmure, although even there things are looking up, with Qatar recently acting as cornerstone investor on the Panmure-led float of a Malaysian technology company. The model elsewhere is similar – just bigger and better.

©Reuters

Qatar is launching another multi-billion dollar push into the banking sector, buying fresh stakes in Russia’s VTB and Germany’s Deutsche Bank.

The Qatar Investment Authority, the principal fund responsible for allocating the gas-rich emirate’s vast wealth, is poised this week to invest up to $1bn as part of a $3.2bn capital raising by VTB, Russia’s second-biggest bank, according to people close to the transaction.

The move comes only three weeks after Deutsche Bank raised €2.9bn from investors as it shored up its capital ratios.

It had initially been assumed that the bulk of those shares had been taken up by existing shareholders in Germany’s biggest lender. However, according to bankers, Qatar was a key investor among a list of new shareholders. The amount invested was undisclosed, but the bankers said it had been more than €100m.

The latest Qatari investments fill out a $10bn-plus portfolio of bank stakes that the emirate has built up over the five-year financial crisis. That list spans both established western institutions, such as Barclays and Credit Suisse, as well as three of the four Bric countries – China, Brazil and now Russia. The Barclays investment, negotiated at the peak of the crisis in 2008, has been the most financially successful.

Qatar’s VTB stake – close to 5 per cent of the bank’s equity – is part of a wider capital raising that is set to see the sovereign wealth funds of Norway and Azerbaijan each make investments of at least $500m apiece, according to people close to the process.

A person close to VTB said the bank was open to looking at other deals with Qatar after the secondary public offering closes on May 24. The bank would sit down with the Qataris after the deal and look for other joint investment opportunities in areas including private equity and mergers and acquisitions, the person said.

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That plan fits the mould used by Qatar with its other bank investments around the world, where stakes are seen as cementing a broader partnership and opening up a conduit for other deals.

The Qataris’ relationship with both Credit Suisse and Barclays has worked particularly well in this regard, bankers say.

However, the emirate has gained a reputation among some bankers for driving a hard bargain. “They are every banker’s worst client,” said one former JPMorgan executive who has worked with them. “They won’t take part in processes, you’ve got to go to them first with a deal.”

One person in Russia familiar with the Qataris’ negotiating tactics said: They are spoiled because they started investing right at the bottom. They are used to big discounts.”

The QIA, VTB and Deutsche Bank declined to comment.

Shareholder activists targeting JPMorgan Chase were talking down the prospects of winning a vote to install an independent chairman at the bank ahead of Tuesday’s annual meeting.

However, investors demanding more robust board oversight vowed to press on even after the meeting in Tampa, Florida, which is seen by some as a referendum on Jamie Dimon, the bank’s chairman and chief executive.

“I think that, regardless of the vote, the fact that the board and the CEO have had to spend so much effort lobbying shareholders is a victory for corporate governance,” said Lisa Lindsley, a director at American Federation of State, County and Municipal Employees, the union pension fund, which has lobbied for the chairman and chief executive roles to be split.

Dieter Waizenegger, executive director of the CtW Investment Group, which advises union pension funds, said votes on re-electing directors were “at least as consequential” as the vote on the chairman-CEO split.

“Regardless of where the vote will go it shows that the board really needs to react and come up with a plan, how it wants to renew itself and we hope they will lay this out at the annual meeting.”

Last year the vote to install an independent chairman received 40 per cent of the vote, significant when many AGMs pass as rubber stamping exercises.

But after the bank lost $6bn betting on credit derivatives, sparking regulatory and law enforcement inquiries, the shareholder activists were hoping to improve on last year’s tally. The vote is advisory but the company would come under mounting pressure if it ignored a majority vote.

However, the Financial Times reported last week that early voting patterns showed less than 50 per cent of the vote going in favour of a split with a significant vote to oppose the re-election of certain directors. Investors who propose motions have regained access to preliminary tallies after the intervention of Eric Schneiderman, New York state attorney-general. Broadridge, a company that compiles the voting record, had stopped providing access to investors after an inquiry from the Securities Industry and Financial Markets Association, Wall Street’s trade association.

“Since last night the ­company is providing us now with preliminary ­tallies,” said Mr Waizenegger, who called the suspension “outrageous”.

Judd Gregg, who was appointed chief executive of Sifma on Monday, said his group had merely asked about Broadridge’s practices and had not asked for investors to be blocked.

Mr Gregg, a former Republican senator and adviser to Goldman Sachs, described the criticism of Mr Dimon’s dual role as “corporate political correctness” and said, as a small shareholder himself, the move to split the roles “does not make a lot of sense”.

©FT Graphic

Robin Hood’s modus operandi was simple and, thanks to Hollywood, is still universally understood. When the financial crisis tipped the global economy into a steep downturn, the English folk hero was the obvious figurehead for a campaign to make the financial sector pay by taxing its day-to-day activities.

“You can draw parallels between the Sheriff of Nottingham and financial services, and Robin Hood redistributed gains back to those who needed them,” says Simon Chouffot, spokesman for the Robin Hood Tax campaign, which was launched in 2010. But implementing a “financial transaction tax” is far harder than robbing wicked medieval landlords.

Eleven eurozone countries – which include Germany and France and account for about a sixth of the global economy – have ambitious plans to change bankers’ behaviour and raise significant funds for stretched fiscal budgets. But they face fierce opposition from the financial sector, which warns of catastrophic consequences for bank profits and economic growth. In Brussels, momentum behind the plan, which was meant to be effective from January 1 next year, has stalled. Indeed, the disputes have reached such an intensity that it is highly unlikely that the proposals will enter into force without being substantially watered down.

Rather than spotting an opportunity to strengthen London’s position as Europe’s financial centre, the UK – not one of the FTT 11 – is launching legal action because it fears damaging repercussions. “I can’t find anyone in the central banking community who thinks it’s a good idea,” Sir Mervyn King, departing governor of the Bank of England, remarked last week. “I do hear enormous scepticism, even from quarters which are alleged to be behind it.” Germany’s Bundesbank has warned publicly about the damaging impact on markets.

Despite such opposition, proponents of a transaction tax have not given up. Brussels even sees the protests as evidence its proposals will have a real impact. If the amount of “noise” was a gauge, “it looks like the design of the tax was just right”, says Algirdas Semeta, the EU tax commissioner.

“The only thing I haven’t heard so far is that FTT is going to speed up global warming and kill baby seals,” adds Benoît Lallemand at Finance Watch, the Brussels-based public interest lobby. “You want to give it a try because you want the financial sector to serve the economy.”

Two main arguments support an FTT. First, banks should make a bigger contribution to public finances, especially given the cost to taxpayers of bailouts over the past five years.

Second, an FTT would encourage more “responsible” behaviour by traders. The original idea in the 1970s for a “Tobin tax”, named after the economist James Tobin, was to slow foreign exchange markets by throwing in “some sand”. Increasing the cost of speculative transactions would mean that prices would better reflect fundamentals and encourage longer-term thinking.

“The traditional buy side – the real, long-term investors – should not really care about the FTT. The problem is that the sell side has dragged them into excessive trading,” says Mr Lallemand.

In recent years, financial sector activity has accelerated dramatically as a result of computer-driven “high-frequency trading”, in which deals are struck in fractions of a second. The notional value of financial market trades vastly exceeds the value of “real” economic activity. That makes many think that countries would be better off with less trading.

“Suppose just as a thought experiment, the UK took as much as 50 per cent of trades from France and Germany. That may be a disadvantage in the short term, but then you look at what the financial system has done to economies over the past 30 years – it was just financial alchemy,” says Stephan Schulmeister at the Austrian Institute of Economic Research in Vienna. “Longer term, the UK will be the loser because you can’t just live on trading assets.”

FTTs have won some support from business figures such as the billionaire investor Warren Buffett and Microsoft’s Bill Gates, especially when proposed as a way to raise revenues for combating global poverty. They exist already in Taiwan and South Korea. They can also be found in economies that rely heavily on financial services such as Hong Kong, and even the UK, where “stamp duty” – a limited FTT applied to equities – was introduced in 1694. At least $38bn is raised across 40 countries each year, estimates Avinash Persaud, executive fellow at the London Business School.

But Brussels’ proposals, which the European Commission estimates would raise €30bn to €35bn a year, are exceptional in their scope. The aim is to prevent the avoidance that undermined previous European FTTs, such as Sweden’s during the 1990s.

No matter where in the world a transaction took place, it would be taxed if either party were in the FTT zone. Financial products issued in an FTT country would be taxed even if the traders were based elsewhere.

At first glance, the proposed rates – 0.1 per cent on the face value of shares and bonds and 0.01 per cent for derivatives – appear modest. Some activities, including spot currency transactions and initial sales of bonds and shares, are exempt.

But these costs would quickly accumulate when assets were traded frequently. A recent Goldman Sachs study put the cost at a total of €170bn for 42 European banks it surveyed, based on 2012 trading patterns, which would have all but wiped out annual profits. In fact, the tax could cause transaction volumes to tumble. The commission assumes, for instance, derivatives trading would contract 75 per cent.

As a result, the tax would undermine the business models of exchanges and paralyse crucial market operations, the industry says. To find funding or balance books, European finance houses make tens of thousands of transactions daily in the “repo” or “repurchase agreement” market, by which assets such as government bonds are sold temporarily for cash. The new tax could bring it to a halt.

“If the FTT is implemented as currently set out, we won’t have a repo market left at all in the 11 countries covered,” warns Godfried de Vidts, chairman of the European repo council at the International Capital Market Association. “If you stop blood flowing around a body, the body dies. The repo market provides the money that flows around the financial system.”

The commission plays down fears of fewer transactions reducing liquidity. “Liquidity is not an end in itself. It does not mean the more, the better,” says Manfred Bergmann, the senior commission official known as “Mr FTT” “Some people say, ‘this is the end of the markets … it is the end of the world’. We are saying, ‘well, we don’t think that when the turnover declines by 15 per cent the market will be less efficient’.”

But financial analysts worry about the cascading effects of the tax, especially in bond markets, where prices are less volatile than in equity markets. “For some non-FTT investors, this may be the tipping point between wanting to invest in FTT zone countries and not being exposed at all,” says Hans Lorenzen at Citigroup.

. . .

It is not just bankers who are alarmed. German industrial companies have warned about an increased cost to transactions essential for their businesses – as well as the impact on company pension fund returns. Even among the 11 countries that have backed a European FTT there are fears it would drive up borrowing costs, already painfully high in southern Europe. Including sovereign debt is “a major concern”, says Ferdinando Nelli Feroci, Italy’s EU ambassador. “We cannot afford the risk of a situation whereby the tax … leads to a situation where yields on sovereign debt may rise.”

There are a host of technical headaches, too. Because the tax would be liable wherever assets from FTT countries are traded, Europe would be relying on authorities elsewhere. Opponents question how effective tax collection would be when, say, US or Japanese banks traded German equities.

Washington staunchly opposes the tax and Congress could retaliate with a law to ban US financial groups from paying it. The tax is “unbelievably objectionable”, says Kenneth Bentsen, president of the Wall Street lobby group Sifma, adding that it is unclear whether European authorities have the right to collect it.

As a result of these problems, few in Brussels expect the FTT to be implemented as currently envisaged; privately banks are being told as much by some eurozone officials. The biggest faultline is between those countries that have a domestic transaction tax and those that do not. France and Italy, for instance, each want their own tax to become the eurozone standard. Both would be less ambitious than the commission proposal.

. . .

Brussels argues that safety in numbers gives the 11 a chance to go for a bolder tax that raised more revenue. But the commission’s objective of covering “all markets, all actors and all instruments” is being tested to breaking point by demands for opt-outs.

Special treatment for the repo market seems inevitable, either through exemptions or much lower tax rates. The dilemma in Brussels is that a less ambitious UK-style “stamp duty” would hit retail products such as equities while sparing the complex derivatives that are the FTT’s main target. “They are searching for a graceful exit but it isn’t easy to find,” says one senior EU official.

“The wonderful irony is that it is the UK which has the best example of an FTT,” says Prof Persaud. “Low transaction costs in finance are good – but zero is not desirable. There is a middle road with a low tax that raises modest revenues but does eliminate some of the excesses.”

All eyes are on Germany, which has no stamp duty. Its original zeal has waned. German officials privately raise technical questions about implementation. “We are just beginning this discussion. It is not a major concern to be very frank,” Wolfgang Schäuble, Germany’s finance minister, admitted recently.

In Brussels, technical discussions continue but no big political decisions are expected before September’s federal elections in Germany. Should a grand coalition emerge between Chancellor Angela Merkel’s centre-right Christian Democratic Union and the pro-FTT Social Democratic party, the FTT negotiations might resume in Brussels with a vengeance.

In Brussels, no outcome is being ruled out, and some kind of “Robin Hood tax” could still emerge. “It has dawned on everyone that this is difficult, risky,” says one senior official involved in the talks. “But we have to do something. We’ve said too much.”

. . .

James Tobin: The spiritual father of taxing day-to-day activities

The spiritual father of transaction tax is Professor James Tobin, a US economist who 40 years ago proposed a levy to “throw some sand in the wheels of our excessively efficient international money markets”, writes Philip Stafford.

Like the European Commission, he was responding to a period of great instability in financial markets. In 1972, the world was still coming to terms with the collapse of the Bretton Woods international monetary system when the US no longer allowed the dollar to be converted into gold.

Big currencies were allowed to float but the derivatives that investors use today to hedge risk had yet to take off fully. Futures markets were still largely regional and focused on commodities.

In the absence of global monetary and fiscal integration, Prof Tobin suggested a tax on cash trades in an effort to curb speculation and wild swings in important currencies. That would improve trading terms for the world’s poor. “Speculation on exchange rates … have serious and frequently painful real internal economic consequences,” he said.

Prof Tobin acknowledged his debt to John Maynard Keynes, who had proposed the imposition of a small transactions tax on all stock exchange dealings as far back as 1936.

But many current proposals have crucial differences from Tobin’s ideas. His preoccupation was foreign exchange – a market absented from European plans.

Prof Tobin, who went on to win a Nobel Prize, argued that it would be an “internationally agreed uniform tax”. In the eurozone, however, only 11 out of the 27 member states are pursuing his recommendation.

Moreover the professor distanced himself from some protesters.

“I have absolutely nothing in common with these anti-globalisation rebels. They’re misusing my name,” he told Der Spiegel in 2001, the year before his death.

The cost for emerging market companies to borrow in dollars from the bond market has fallen to a record low as central bank intervention stokes investor demand for riskier and higher yielding assets.

The average yield on investment-grade emerging market bonds has fallen to 4.5 per cent, down from 5.6 per cent at the same time last year, according to the Barclays Emerging Corporate Bonds index.

Emerging market corporates have been taking advantage – there has been $153bn worth of issuance this year, according to data from Dealogic, which is the highest on record and more than the $92bn in the same period last year.

Last week saw a record-breaking $11bn worth of bonds sold by Brazil’s state-controlled Petrobras, the largest ever debt sale from an emerging market company. Demand was strong and the order book topped $40bn.

The high demand is being created by central bank bond buying worldwide, which has pushed down sovereign yields and forced investors looking for a decent return to move into riskier and higher yielding assets.

“Interest rates are so low right now we have seen funds flowing out of traditional ways of keeping money and into alternatives such as emerging market corporates,” said Michael Marrese, head of European emerging market economics and sovereign strategy at JPMorgan.

The danger for the companies lapping up dollar debt is that it exposes them to the risk of currency fluctuations. If their local currencies fall, their debt burden will in effect rise, which could even lead to bankruptcies.

“Companies can get themselves into trouble with unmatched currency exposures when exchange rates move in large and unexpected ways,” said Philip Robinson, senior credit officer at Moody’s in a recent note.

Christine Lagarde, managing director of the International Monetary Fund, highlighted the dangers in April and warned of the risks posed by emerging market companies borrowing in foreign currencies.

There are also risks for investors should central banks pull back from their bond buying programmes.

That would cause sovereign bond yields to rise, and bond prices to fall, which could lead to big losses. It would be bad for all fixed income globally but it could hit emerging market corporate bonds particularly hard because of low liquidity

The yield on the JPMorgan Corporate CEMBI High Grade index, which is the benchmark for many corporate bond fund managers, is 4 per cent, which is fractionally above the all-time low at the start of this month.

©Dhiraj Singh

The son also rises: Prashant Ruia is the second generation to lead the family-run group

India’s Essar Oil, a division of London-listed Essar Energy, is set to announce an unusual debt financing deal with state-run China Development Bank, in a further sign of deepening financial ties between Asia’s two largest emerging economies.

The heavily indebted group will on Tuesday sign a three-way memorandum of understanding on a “funding for fuel” agreement between itself, CDB, and oil producer PetroChina.

It is the first such arrangement involving a big Indian company but follows other Chinese overseas loan-for-oil deals, including an agreement with the government of Venezuela, to which China loaned $20bn in 2010 in exchange for guaranteed oil shipments.

The agreement coincides with Chinese premier Li Keqiang’s visit to India this week, and will see Mumbai-listed Essar Oil begin negotiations to raise an unspecified amount of foreign currency debt with CDB, according to people familiar with the situation.

Any debt deal would in turn be underpinned by a second arrangement to export products from Essar’s main oil refinery to PetroChina, a listed subsidiary of China National Petroleum Corp, the country’s largest oil company by production.

Essar, chaired by Prashant Ruia, and controlled by his father and uncle, the billionaire brothers Shashi and Ravi Ruia, declined to comment on the specifics of the deal.

But Lalit Gupta, Essar Oil chief executive, said the move was part of a strategy to “dollarise” the company’s rupee-denominated debt, to match the dollar revenues it exported on oil exports.

“We have approvals from the Reserve Bank of India to take on $2.27bn in new dollar loans, of which we have raised about $480m so far,” Mr Gupta said. “So we are looking for the remaining $1.8bn, and to do this we have been discussing with a number of banks in China and elsewhere.”

Essar Energy’s net debt totalled $6.9bn at the end of 2012, while its Essar Oil subsidiary has only recently emerged from a regulatory process known as the corporate debt restructuring (CDR) mechanism, a forum under which near-bankrupt Indian companies can refinance debts with their creditors.

I would think we will see more and more of this activity

– Kalpana Jain, a senior director at consultants Deloitte in India

The arrangement follows other agreements in which heavily indebted Indian industrial conglomerates have turned to cash-rich Chinese state-backed banks for inexpensive debt refinancing.

Last year billionaire Anil Ambani’s Reliance group secured a $1.2bn loan from a trio of Chinese state-backed banks, including CDB, while Lanco Infratech, another infrastructure group, also agreed a $600m debt deal with the same bank.

Analysts said the move was likely to be the first of many deals in which Indian companies developed creative arrangements in their search for cheap Chinese funds.

“I would think we will see more and more of this activity,” said Kalpana Jain, a senior director at consultants Deloitte in India. “China is looking to import more of these products, and they will source it from wherever they can. And they will provide funding for any deals underneath that too.”

Tuesday’s deal could also involve a future agreement in which PetroChina became a supplier to Essar’s refinery.

In a statement Essar said: “We have been sourcing a significant portion of our crude from Latin America . . . PetroChina is a strong player in this region and will thus continue to be an important trade counter party for us.”

Shares in Essar closed up 1.2 per cent at 144p in London.

©Bloomberg

Nationwide Building Society is finalising plans to become the first mutual to raise capital via a new instrument whose creation was recently approved by EU legislation.

The UK’s biggest building society plans to raise between £300m and £500m over the next year in a “test water” issuance of the new mechanism, known as core capital deferred shares.

Mutually owned organisations such as building societies and co-operatives have narrower options when it comes to raising capital compared with their listed peers as they cannot issue equity.

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The traditional method to raise money from investors has been the issuance of permanent interest-bearing shares, known as “Pibs”, a hybrid between stocks and bonds. But these are no longer regarded by regulators as providing core tier one capital – a key measure of balance sheet strength.

However, EU legislation has paved the way to allow institutions to raise higher quality capital through core capital deferred shares. The EU’s Capital Requirements Directive IV, which was formally passed in the European Parliament last month, is best known as being the legislative framework for the Basel III agreements but it also provides the legal basis for the creation of core capital deferred shares.

These instruments, which could potentially be traded on the secondary market, will count as loss-absorbing core tier one capital. Individual institutions will decide on the distribution policy to investors.

Nationwide’s issuance will take place “largely to prove it can be done and to put a stake in the ground”, said Graham Beale, its chief executive.

The building society has been sounding out potential investors in recent months and believes that high net worth retail investors, as well as institutions, could be interested in investing in the instrument. It cleared the ground for issuing the new form of capital after its members voted overwhelmingly in favour of it at their annual meeting last year.

A strong mutual sector is regarded by politicians as important in ensuring there is a decent level of competition in UK retail banking. However, the problems facing the Co-operative Group have laid bare the challenge for mutually and co-operatively owned lenders should they need to beef up their capital.

The mutual is exploring ways to bridge a capital shortfall of as much as £1bn. Its bank was subject to a six-notch downgrade by credit rating agency Moody’s to “junk” status earlier this month, partly on concerns that underperforming commercial real estate loans will exert further pressure on capital. In April, Fitch downgraded the Co-op Bank two notches to BBB minus, its lowest investment-grade rating, and placed it on negative outlook also citing concerns on capital.

Nationwide will report full-year results on Wednesday.