Spain To Impose Taxes On Banks And Power Firms Temporarily

On Tuesday, the Spanish government announced that they would be imposing temporary taxes on banks and power companies in the country. This would help them generate 7 billion euros between 2023 and 2024, which will come in handy in dealing with the soaring inflation. The announcement from the government triggered a sell-off in the banking sector.

Banking shares fall

There was a 13% fall in Sabadell after the Spanish government’s announcement, but it managed to trim some of its losses to close at a decline of about 7.4%. Meanwhile, there was a 5% and 8.6% fall in Bankinter and Caixabank, respectively.

Pedro Sanchez, the Prime Minister of Spain, told the parliament in a speech that the annual revenue generated via a tax on the extraordinary profits of power companies in 2023 and 2024 would bring in 2 billion euros. He also said that they would be able to generate 1.5 billion each year through the surprise tax imposed on banking institutions.

According to Sanchez, big banks would be their target in terms of the tax, as they have already begun to rake in benefits, thanks to the rise in the interest rates.

Banks not happy

Jose Luis Martinez, the spokesperson for the AEB, which is the Spanish banking association, asserted that the possible increase in interest rates by the European Central Bank would not necessarily improve the profitability of financial institutions. He said that neither would it be translated into any extraordinary profits, but would rather respond to the fall in economic activity and rise in inflation.

The Spanish government did not shed any light on the rates that would be implemented, or how the taxation would work. It only disclosed that the tax would be applicable to companies that have a turnover of about 1 billion euros.

Martinez further disclosed that the government had not informed or consulted the sector, even though they did have a permanent dialogue.

Pressure on banks rises

According to analysts, banks are already under a great deal of pressure because of recession fears and there is also a possibility that the rate hikes may not be as significant as expected. Analysts further said that this announcement had had an immediate impact on Spanish banks because it had not been expected, which meant that it came as a complete shock.

The tax would also hamper the ability of lenders to generate profits in situations where their provisions will also go up. Furthermore, it is also a given that banks that have mostly domestic operations would suffer the most, as opposed to those that have more diversified businesses, like Santander which fell around 3.7%, and BBVA.

Utilities also saw their shares fall, including Naturgy, Endesa, and Iberdrola, which declined by 0.7%, 0.6%, and 0.2%, respectively. The government had already mentioned earlier that taxes would be imposed on utilities.

As per Sanchez, the biggest challenge for the country was inflation, which had largely occurred because of the Russian invasion of Ukraine back in February.

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