Monti warns Belgium over bond market law

Date: 08/05/1997

By Tim Jones

BELGIUM has been hauled up before the European Commission for violating single market laws with its bond market practices.

Internal Market Commissioner Mario Monti is taking the first step towards legal proceedings against the Belgian state for discriminating against its own residents when it offered a US dollar denominated bond for sale last year.

The Eurobond, so-called because it was issued on the European markets but in a currency not controlled by the issuer, was only put on sale to foreigners or domestic financial institutions.

Owners of the paper would be entitled to a fixed rate of interest per annum until the bond expired after five years. An added attraction was that the bond could provide an investor with a substantial capital gain if the dollar strengthened over that period.

In February last year, a wealthy member of the Dutch Liberal VVD Party and former Commission official who has lived in Belgium for two decades decided he wanted a piece of the action. To his dismay, he was forbidden from buying some of this government debt. He complained to fellow party member and MEP Florus Wijsenbeek, who discovered the Belgian government had been found guilty of breaking single market laws back in 1994 when it applied the same conditions to the sale of deutschemark-denominated paper.

The Belgian authorities argue that residents of Belgium, who are subject to a withholding tax on interest income, should not be able to avoid this by subscribing to the Eurobond. Non-residents, at whom the bond issue was aimed, are not subject to this tax.

Wijsenbeek wrote to Monti in December to seek clarification and has just received a reply, in which the Commissioner states. “Such restrictions are incompatible with Community law on the free movement of capital.”

Monti is now poised to give the Belgian government a 'reasoned opinion' warning that he suspects the country is not fulfilling its treaty obligations. The Belgians must respond within a few weeks or face action in the European Court of Justice.

The Belgians argue that Article 73 of the treaty allows a member state to take “protective measures” if “movements of capital lead to disturbances in the functioning of the capital market”.

But Monti was not satisfied that they could differentiate between taxpayers based on their place of residence or investment. “The legitimate concern to ensure that no tax evasion takes place could be met by other means and not by measures restricting the free movement of capital,” he said.