Spain hits banks and utilities with windfall tax

Spain became the largest country in the eurozone to impose a windfall tax on banks as a sign of European governments’ quest for funds to mitigate the painful effects of price increases.

Socialist Prime Minister Pedro Sánchez’s decision — which the government said was intended to curtail banks’ profits from rising interest rates — caused sharp falls in Spanish bank shares.

Shares of CaixaBank, Bankinter and Sabadell fell about 10 percent after the levy was announced, while those of Santander and BBVA, the country’s two largest banks by market capitalization, fell nearly 4 percent.

The bank levy came without warning and was heavily criticized by analysts.

“This is a crude form of populism. The government’s argument is that banks benefit from rising interest rates,” said José Ramón Iturriaga, an analyst at Abante Asesores. “But there was no state compensation during the long period when rates were negative.”

The government plans to use the money raised to, among other things, build 12,000 houses in Madrid, make most state train journeys free between September and December, and provide 2 billion euros in scholarships to people aged 16 and over.

Sánchez, who heads a coalition government with far-left lawmakers, said a similar tax would be levied on energy companies as part of the package designed to protect the less fortunate from the impact of inflation and rising energy prices.

“We are asking major companies to ensure that any exceptional benefits gained under the current circumstances are channeled back to employees,” Sánchez said in the opening address of a three-day state of the nation debate.

Inflation in Spain rose to a 37-year high of 10 percent in June, from 8.5 percent in May.

Sánchez’s move comes as his party seeks to regain initiative in the face of a resurgent Popular opposition party.

The temporary taxes on banks and energy groups, to be applied in 2023 and 2024, are expected to raise a total of €7 billion – €1.5 billion per year from the financial sector and €2 billion per year from utilities.

Unexpected taxes on energy companies that benefit from high oil and gas prices are on the political agenda across Europe, but only a few countries have considered imposing new levies on banks in the wake of Russia’s invasion of Ukraine.

Hungary introduced a similar measure to Spain’s in May. In Poland, where the right-wing government introduced a tax on bank assets in 2016, the leader of the ruling Law and Justice party warned earlier this month that banks could be hit with another windfall if they mistreat their customers.

The Spanish government did not explain how the new levies on banks and energy groups would be applied.

Share prices of utility companies Iberdrola and Naturgy fell by less than 1 percent and suffered less than banks as the government previously indicated it would tax energy companies.

In September, the government targeted €2.6 billion in “excess profits” from utilities that do not use gas but benefit from rising gas prices. It later returned to the measure under pressure from energy groups.

The new taxes and other measures, Sánchez said, were designed to “protect workers and the most vulnerable.”

The prime minister’s popularity has been hurt by the rising cost of living, with the conservative People’s Party catching up with its socialists in national polls and winning a decisive victory in regional elections in Andalusia last month.

“I know it’s getting harder and harder to make ends meet,” Sanchez told parliament. “I understand the suffering, frustration and anger for sharing it.”

Additional reporting by Raphael Minder in Warsaw and Stephen Morris in London

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