PHILADELPHIA (MarketWatch) — Some European banks might find themselves sideswiped by the Republican tax plan, an international expert said.
Kristin Forbes, a professor of global economics at the Massachusetts Institute of Technology, estimated that $2.5 trillion is being held by U.S. firms overseas and available for repatriation. The Republican tax plan passed last month gives big incentives in the form of a lower tax rate to bring the cash home.
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A good share of the cash is probably held by European financial institutions, Forbes said Saturday during a seminar at the American Economics Association annual meeting.
“Some of these [European firms] are better capitalized, in better shape than over the past couple of years, but there is a chance there are some that aren’t terribly well capitalized could see some big outflows. This could create some problems for some financial institutions in Europe,” she said.
Forbes said she doubted that U.S. companies would use the cash to fund new investments.
“If they have good investment opportunities today, they are probably doing it already,” Forbes said.
During the last repatriation in 2004, almost no money brought back to the U.S. was invested, she noted. “Roughly 90 cents out of every dollar brought back was spent in shareholder payouts — either share repurchases or dividends,” Forbes said.
“My base case is most of the money [this time] will be spent in similar ways than it was spent before,” she said.
The dollar DXY, +0.30% will get a bit of a boost from the flow of capital back to the U.S. but the impact won’t be very big, she said.