Viewing posts categorised under: Italy

Tax break for pensioners moving to Italy

By Andrew Lawford
This article is published on: 14th August 2020

Anyone like the sound of living in Italy and paying only 7% tax?

Generally speaking, if you are contemplating the move to Italy you will be thinking about many things, but saving on your tax probably isn’t one of them. So let me give you a nice surprise: if you are in the happy situation of being a pensioner considering moving to Italy, 7% tax on your income is possible, subject to a few rules, for the first 10 years of your residency in the bel paese.

This all came about in 2019’s budget and had the aim of encouraging people to move to underpopulated areas of Italy. Initially, the rules were that you had to take up residency in a town with fewer than 20,000 inhabitants in one of the following regions: Abruzzo, Basilicata, Calabria, Campania, Molise, Puglia, Sardinia or Sicily. Subsequently, the criteria were extended to include towns in the regions of Lazio, Le Marche and Umbria that had suffered earthquake damage and which have fewer than 3,000 inhabitants.

Of course, being Italy, something had to be difficult in all of this, and indeed the law makes reference not to a list of towns but instead tells you to look at ISTAT data (ISTAT is the Italian statistical institute) for the population levels on 1st January in the year prior to when you first exercise the option.

Given the difficulty in finding out exactly which towns would be covered by this rule, I delved into the ISTAT data and also dug out the relevant references to earthquake-struck towns with fewer than 3,000 inhabitants in the other regions mentioned above. I have put all of this in an Excel file which gives a list of towns eligible for the

pensioners’ tax break in Italy divided by region and then further by province, so that you have a rough geographical guide as to the areas you could consider moving to Italy.

As I was sifting through the ISTAT data it suddenly dawned on me that if the cut-off is 20,000 inhabitants, then almost the whole of Southern Italy is eligible for this 7% regime, and you can include in that some truly delightful places such as Vieste in the Gargano (Puglia), or even the island of Pantelleria. This is possible because Italy is divided up into municipal areas that sometimes have more feline than human inhabitants. Obviously, if you are looking for raucous nightlife then you are likely to be disappointed by what is on offer, but if, on the other hand, you like the idea of not having too many people around, then you could do worse than the town of Castelverrino in Molise (population 102) or Carapelle Calvisio in Abruzzo (population 85). Perhaps one day you could even become mayor.

Flat Tax Regime

This new flat-tax regime comes amid a move by a number of European countries to attract pensioners to their shores. Portugal offered a period of exemption on income tax for foreigners (the benefits of which they are now reducing) and Greece has recently announced the intention to offer a 7% flat tax on foreign-source income for pensioners (I wonder where they got that idea from?), which is also promised for 10 years. There is some discussion about the fact that the EU is not generally well-disposed towards these preferential tax regimes, which could lead to them being phased out in a relatively short period of time – so for those looking to make the most of them, time could truly be of the essence.

The great thing is that the 7% rule applies not only to your pension income, but can be applied across the board to any foreign-source income and there is also a substantial reduction in the complexity of the tax declarations that must be made. There are further tax-planning opportunities in all of this, because much will depend on whether you are planning on being a short-term or long-term resident of Italy.

As always, the devil is in the detail as far as tax and residency planning is concerned, and the year of transition when you first establish residency in Italy is key to setting yourself up in the most efficient manner.

So if the above sounds interesting, please get in touch and I would be happy to send you the list of eligible towns and discuss how the rules of the regime apply to your situation.

Are we going to change?

By Gareth Horsfall
This article is published on: 25th June 2020

25.06.20

Any change, even a change for the better, is always accompanied by drawbacks and discomforts

– Arnold Bennett –

Will things change for the better post Covid 19?
Nearly everyone I speak with at the moment keeps asking, will the world get better and will we care more for the world and each other as a result of Covid? Have we learned our lesson about sustainability, ecological damage and the lifestyles we lead?

It’s a good question and not one I would like to put a bet one (I am afraid that I am a sceptic when it comes to human nature and don’t believe that many are inclined to change behaviour so easily). That being said I could be being proven wrong, because after speaking with some of our asset manager partners recently (Tilney, Rathbones, Jupiter, Janus Henderson, to name a few), they pointed out that there are some notable positive trends that are emerging from the lockdown during the Covid crisis. These trends could seriously affect the way we lead our lives and also hence how we invest our money and so are worth a mention here.

I will touch on 4 trends which could have legs and are great dinner party conversation if you are bored of Covid talk and talk of house prices!

1. Smart working
Let’s just get the pronunciation correct for Italy before we start. It is ‘smat’ whirr-king’ Now that is out of the way, we can talk about the impact of smart-working on the workplace.

The best way to explain this is to give the example of a friend in Rome. Our kids go to school together and he works as a director at the energy company ENEL. He was informed, not long after the lockdown, that smart working arrangements would become permanent with immediate effect and that from January 2021 they will impose a global 3 day smart working, 2 days in the office, working week. This will apply to all global managerial staff.

What is interesting about this is that ENEL are not alone in this decision. There are numerous other large firms taking the same decision. Enel have understood during lockdown that as a company they can perform all their normal activites online: conference calls, video meetings etc. For the days in the office the work place will be arranged into a number of generic work stations with connection capabilities and which will have to be booked in advance to ensure a place on your work day.

As a result of this ENEL are not going to renew 1500 contracts (which was to be expected!) but more interestingly they are going to be closing a significant amout of office space which will go onto the property/rental market. With many other firms taking similar decisions, what is the impact going to be on the commercial and residential property market? Could this lead to a surplus of property and push prices in cities down? Equally, what about people working from home, is the space they have sufficient? These thought leads nicely onto Trend No 2

2. Nesting
I always thought that nesting was the time when a young couple met, starting dating seriously and before long started making plans to buy a house, settle down and maybe think about planning a family.

Nesting is now the termed also used for property owners who are looking to either sell up and move from a urban area to a rural one, or others who are looking to purchase a second home in a rural/countryside area.

Data is coming out at the moment to show that the professional classes (who are the main beneficiaries of smart working) are taking steps to rethink their lives in light of the lockdown crisis. In the USA and also the UK data is showing that there has been a surge in requests for information about countryside properties or periphery areas to live, equally homes in urban areas with a garden and/or near an outdoor space such woods or lakes. In London, searches for houses with gardens are up 42% on last year. Is this a long term trend or something that we will see more of? At the moment it is likely to be a knee jerk reaction to the lockdown and is predominantly something that the professional classes have the fortune of being able to take advantage of, but it is not beyond imagination that this is a trend that is here to stay because, like my friend who works for ENEL who is also considering his current living arrangements (he will need an office space at home) alot of people who will now have the option to work from home, will want to do so in a non-polluted, potentially more creative space with perhaps contact with nature or at a minimum another room in the house which they can turn into a work space.

And it’s not just the property market that this could affect because if the trend could affect the provision of public services and utilities. Things like health services, schools and also the distribution of retail outlets as a way of servicing more spread populations may need to be rethought. It would present some real challenges but create some great opportuntities as well. What will be interesting is to see how bailout money from the EU is allocated and what, if any, conditions are attached to it because the talk is that significant demands will be made for EU states to invest in green infrastructure, show significant contribution to climate change goals and the provision of health services to citizens everywhere, to be eligible for Covid 19 bailout money.

Interestingly, in Italy, I saw a news article a week or so ago with a Sindaco in Umbria who said that he was looking to get funding to get the medeival town connected up to high speed internet, with the idea to re-populate the area with younger professionals who want to work from more beautiful places and not be confined to cities. I have been saying the same things for years. Without high speed internet connection the most beautiful towns, cities and villages in Italy are going to be inhospitable to anyone, not just the younger generation. To reverse the brain drain first you need to provide high speed internet connection to your citizens. High speed internet has become a utility just like gas, water, and electricity. So, let’s hope they manage to do something about it and attract human capital away from the cities and back into more creative and beautiful parts of the country.

3. The return of the family meal
This is a nice new trend for whoever yearns for the old days of sitting around the family meal table and enjoying quiet time together. Apparently during the quarantena the habit was on the increase and the latest research is showing that families who had traditionally not eaten together because of professional parents returning home at different times in the evening, or otherwise being busy, were being forced together and taking advantage of this time to immerse themselves in the culture of the traditonal family meal.

What might this mean in terms of changing trends? Well, it appears that during the lockdown, those same people who were returning to the family dinner table, were also purchasing more expensive food and more of it. (I can attest to this because, I also thought that since we were locked at home with no way of escape, then we should at least eat well). If people eat at home more frequently and can enjoy family meals more frequently, then might they be more inclined to buy more expensive food, but also more expensive wine? and more of it? That may also mean that people also demand more takeaway / delivery services (think Deliveroo, Just Eat, Glovo etc). And lastly what kind of long lasting impact could it have on the hospitality sector, restaurants and hotels?.

These are trends which money managers are watching closely, less because of the habit itself, but more the reaction of big food and drinks firms. To give you an example the big drinks firms Diageo has carried out a survey and found that 80% of its sales are for use in the home, not for consumption in bars etc. This may come as no surprise but it does beg the question for a firm like Diageo – why are they selling through third party channels like supermarkets and other distribution channels when most people today are used to receiving deliveries at home? Could they cut costs by selling directly? This brings me to point No 4 and a story about everyone’s favourite sportswear compnay Nike.

4. Cutting out the middleman
During the lockdown, I like many other people, watched quite a bit more Netflix than I am accustomed to. One of the series which I watched and thoroughly enjoyed was ‘The Last Dance’, a documentary about Micheal Jordan and the story of the Chicago Bulls during their record breaking 6 times NBL championship wins. A great one to watch if only to watch the acrobatic magnificence of Micheal Jordan in his prime. Why am I mentioning this?

Nike created the line ‘Jordan’ on the back of the sporting genius of Micheal Jordan and it has been a success ever since. What has been notable is that that the brand’ Nike Jordan’ during his time at the top was built on the back of traditional advertising/marketing and retail outlets. But times have changed. Now, younger people are communicating through different social media channels, the latest being TickTock, and these are changing consumer patterns of behaviour. People are less inclined to spend their time trawling retail outlets to try and find that special pair of Nike trainers when they can see their sporting heroes wearing them on videos and also order them easily with a few clicks on their phone.

So this brought Nike to a change in strategy a few years ago. A focus towards selling more directly to clients, and in much the same way as the revolution with food and drinks manufacturers as I explained above, Nike have been experimenting with direct consumer channels for years and are looking to expand this.

By direct consumer channels I mean selling directly from their own website and/or from a Nike store. Nike stores in themselves are an interesting experience. There are a number in Rome and I went into one about a year ago. They are a less a store, but more of an experience. This experience feeds into their brand and message around ‘Just do it’. It is very impressive and in this way they don’t dliute their brand or their profits through 3rd party distribution channels.

This trend which Nike has been developing for years now, is a trend which we could see grow after Covid as shopping habits change even more. As an example I know a couple in Rome in their 50’s who had never used Amazon before the lockdown because they thought it was unsafe. During lockdown they decided to sign up and use it. They are hooked and cannot believe how easy it is and how much choice they have. We already know that retail is being revolutionised but this could take it further.

Can we imagine a future where we have one login for all retail outlets, supermarkets etc, and when we order from any one of them a delivery is made to a locker installed in or near our home that deliveries which can be accessed with a secure code. A Utopian (or Dystopian future?).

If just a 20% shift is created in consumer behaviour as a result of this crisis, a 20% in the way we live and work, this could create an equally tectonic shift in the corporate sector and the way they engage with us. For our money it will create opportunties and also there will be failures. More importantly we are likely to see an even greater shift to companies who have a strong focus on the enviornment, social protections and good governance of their companies.

More than ever our money managers need to be on top of a changing world. Thankfully they are.

If you would like to have a health check on your money for the future,
then you can get in touch by contacting me on
gareth.horsfall@spectrum-ifa.com
or call/whatsapp on +39 333 649 2356

Getting residency in Italy before Brexit

By Gareth Horsfall
This article is published on: 16th June 2020

In this E-zine I am going to provide anyone who is still wondering about residency in Italy, before Brexit, with a quick, hassle-free guide how to obtain it.

I was hoping that I could try and avoid the ‘B’ word again in my lifetime, but alas we are not quite there yet and a number of people have contacted me in the last two weeks to ask about the process of getting residency in Italy before Brexit day arrives (currently 31st Dec 2020, although I have my suspicions it might be extended again – watch this space!).

You may know that the process of getting residency in Italy once the UK leaves the EU will get considerably more complicated. If you are unconvinced then ask an American resident in Italy, they should be able to tell you! Therefore, if you are a British citizen and thinking of making the move to Italy, and are in a position to do it now, then you may want to consider applying before Brexit day to simplify your life. Equally, I know there are many people who are living in Italy but are procrastinating about taking residency. This will act as a useful guide for anyone still sitting on the fence and feel free to share it where you see fit.

Before I give an explanation of the things to watch out for, here is a summary of the much more complicated process of elective residency, if you choose to do so POST Brexit

***This guide is mainly for people who are choosing to move and sustain themselves economically, i.e. retired individuals or those living from savings. It is not relevant for anyone considering self/employment in Italy. Different rules may apply in those cases***

Post Brexit (non EU citizen) elective residency application process

Step 1: Make an appointment at the Italian Consulate in your home country – this can takes months!

Step 2: At this appointment you need to complete a request for a visa granting you a right to live in Italy for more than three months in any six month period. You will be required to submit information on where you intend to stay (a property or rental, and evidence of specific accommodation), proof of your ability to support yourself financially, with evidence of income of at least €31000pa per single person or €38000pa for a couple, although this may be flexible depending on a) who you are speaking with and b) which region of Italy you may be moving to. You will also be required to prove that you have sufficient private health insurance cover and will not be a burden on the Italian health care system. The visa will be granted within 90 days of application being submitted.

Step 3: Once you receive the visa and make your move to Italy, within eight days you will need to make your request for a Permesso di Soggiorno (right to stay). This can be obtained from the post office. This process can take weeks, even months to issue and you will be informed that you need to go to your local Questura once it is granted, to pick up the certificate. The permission will normally be issued on a one or two year renewable basis for five years, after which time you can apply for a long term permission.

This is a very brief overview of the procedure, but as you may have understood, the process from start to finish is likely to take months, possibly years, and will probably need a lot more planning to make the move. In addition, there are much higher minimum income and savings requirements. However, as things stand you can still apply as a EU member state citizen until 31st December 2020 and most of the EU member benefits will carry forward after Brexit provided that the application is submitted before Brexit date.

The NO-HASSLE guide to getting residency in Italy before Brexit

So let’s examine the process of attaining residency as things currently stand and see why, if it is possible for you, it might be better to try to get residency before Brexit.

Going along to the comune/municipio office and requesting residency is a relatively easy process, but can be cumbersome if you are not prepared (it took me five visits to the Municipio in Rome to receive my residenza). You will inevitably run into people who have formed opinions about Brexit already and may refuse your application on the basis of the UK having left the EU already. This is incorrect and you would do well to go armed with the Italian ministry circular which says as much. You can find that document HERE. There are a few simple things you need to provide, but they may deem your evidence unsatisfactory for their requirement. Knowing the pitfalls of each criteria can be the difference between multiple failed visits to make the residency request or one successful visit.

The three basic items which you will require (apart from identification) are:

1. Evidence of sufficient economic resources to stay in Italy
2. Evidence of health insurance to cover at least the first year in Italy
3. Evidence of a place to stay

Whilst these three items might seem at first glance to be relatively simple to provide, there are some idiosyncrasies that trip people up and which can cause delays. Given that time is no longer a luxury then knowing the details could help. So, let’s deal with each one in turn.

[cq_vc_accordion contentcolor=”#333333″ titlecolor=”#957b00″ arrowcolor=”green”][cq_vc_accordion_item accordiontitle=”1. Evidence of sufficient economic resources to remain in the country”]The first thing to understand is that this requirement is governed by regional authorities and is very much at the discretion of local services as to whether they will accept you in their comune or not based on your evidence of income, savings, pensions etc. Rome or Milan, for example, will have very strict rules and will adhere to them rigidly. A small comune in Abruzzo, for example, might be more relaxed as they are happy to have an influx of foreign money into the area. However, it is worth checking with your local comune first to see if they have any minimum income levels for which they would need to see evidence. At the time of writing, the minimum income requirement for the Roma Capitale comune is €5.824,91pa and they would typically expect to see approximately €10,000 in savings as an emergency reserve. However, these figures can be subject to interpretation depending on who you are speaking with on any particular day! So be prepared.

Make sure you take both the original and copies of any documents with you to any meetings, including bank statements showing regular income payments, or pension statements demonstrating the amount of money you have in the fund and any regular income payments from it. Additionally, if you have any savings and/or investments then take recent statements along as well.

Remember to only present documentation that you are asked for, so as not to open a can of worms which could generate requests for additional documentation. [/cq_vc_accordion_item][cq_vc_accordion_item accordiontitle=”2. Evidence of health insurance to cover at least the first year in Italy”]This factor seems to be the one that trips most people up when making an application for residency and it comes as no surprise. The EU requirements for a change of residence clearly state that when transferring EU member state, you must have sufficient health cover provision to not be a burden on the health care system. (If you are employed then this doesn’t apply as you will be automatically enrolled in the health care system when paying social security contributions.)

The confusion derives from the following factors:

i) That all EU citizens have an emergency health card which would cover you for travel within the EU area. This is correct. In Italy it is known as the TEAM card and is link to the tessera sanitaria and in the UK it is called the EHIC. However, this card only provides temporary emergency cover for medical care during visits as a tourist in the EU area and not any longer term protection. Therefore, making an application for long term residency cannot, by definition, be covered by a short term medical provision agreement.

ii) Another assumption is that once you are resident in Italy you can apply to make a voluntary contribution to the health care system to receive full medical care (see document HERE). This is correct and the price is relatively cost effective depending on your annual total income. However, here is where a classic Catch 22 exists. You cannot register for and pay for healthcare in Italy until you have residency and you cannot have residency until you can demonstrate that you have adequate medical insurance cover in place. Therefore, an interim arrangement is needed as per point iii) below:

iii) It is assumed that a health care insurance needs to be a full provision medical insurance policy, e.g. Bupa. This is not the case and could cost thousands for full medical care benefits which are not needed for the purposes of making a residency application. In fact, we need to refer, once again, to the EU rules regarding residency. The rules state that if you are not working and have sufficient economic resources to live on then you need to provide yourself with the equivalent S1 reciprocal agreement on healthcare for retired member state citizens, until such time as you are eligible for the S1 or have alternative arrangements, e.g. annual voluntary payment into the Italian health service.

To resolve this you need to take an insurance policy on a one year renewable basis, which is acceptable for the purposes of obtaining residency and that can be cancelled from the second year in the case that you can make the application for the annual voluntary payment.

Speak with a good insurance agent and ask for cover for the codes: E106, E109, E120 and E121. These are the specific codes which need to be covered for insurance purposes. However, it would be sensible to ask the insurance agent to check with your local comune in the case that they have additional regional or local provisions that they would also want to cover. My advice has always been to stick to one of the main insurance companies in Italy rather than going through smaller companies. The main players would be Generali, Zurich, Allianz, Groupama and UnipolSai, as examples. A policy of this nature may cost a few hundred instead of a few thousand depending on your age and pre-existing health conditions. [/cq_vc_accordion_item][cq_vc_accordion_item accordiontitle=”My tips for a better residency application”]In addition to the above, here are a couple of tips which you might find useful.

An email pec
You might be thinking, what is an email pec? It actually stands for Posta Elettronica Certificata and I find it is one of the most useful things to have in Italy. A few years ago the government introduced legislation to allow electronic communication between individuals and municipal offices/agencies, police and also companies. However, they rightly had suspicions about the efficacy of traditional email channels because of the inability to confirm the identity of the individual sending the email. Enter: pec email.

Pec email is an email account that can be opened for about €30pa with a lot of service providers and during the opening process you are required to provide identification (copy of passport and/or ID card) to clear a security check. Once passed, the account is opened and you will be able to communicate freely with most official offices. Any email you send is certified as having been sent from you, but in addition you receive a receipt when the email has been received and accepted by the receiving party.

This is useful in many ways, but specifically with regards to residency it does mean that you can submit an application to your comune by sending all the necessary information via the pec email. (Check the comune website for their specific email pec to which you can send documents). For instance, if you are unable to return to Italy, for whatever reason, and want to submit your application before Brexit date, then it can be done via pec email.

Residency applications will be backdated to the date which you officially submitted the application (with correct documentation), so for any applications submitted by pec, or in person, before Brexit date, but then formally approved afterwards, you ‘should’ be granted residency from the moment of application.

You will also find an email pec useful if you have to submit documentation to the police, other government agencies and even some companies. For the cost of approx €30pa I think it’s worth it, although responses to your emails will be few and far between and any follow up may need to be done in person or on the phone. Expect to do some follow-up![/cq_vc_accordion_item][/cq_vc_accordion]

The best tax day of the year 2020
July 5th

A little known point about residency and tax, in Italy, is reference to the 183 day rule.

This rule states that if you are considered resident in Italy for less than 183 days per annum, then you are not considered tax resident in the country for the full tax year (different rules apply to employed persons). So, for calendar year 2020, if you take residency after the 5th July then you are assured to be considered non resident for the full tax (calendar) year and your first taxable year will be 2021.

This might be important for anyone who is thinking of applying now, but might like to remain tax resident elsewhere for the year 2020.

It will not affect your ability to get residency in Italy in 2020, but it will merely mean that your taxable year of residency will not start until 2021.

A useful piece of information if you need to look at your financial arrangements and how you can streamline and simplify them to make them more tax effective for life in Italy. The transition year is always the most important because of the ability to use cross border financial planning opportunities to their fullest.

And that, in brief, is your no-stress guide to to obtain residency in Italy as an EU citizen. However, whilst I write the words ‘no-stress’, they don’t correspond with my experience of municipal offices in Italy, or indeed the experience of many others. Always expect the unexpected.

I wish you or anyone you know all the best of luck making an application for residency in Italy, pre-Brexit, and who knows, we may even be in for an extension again. My guess would be at the witching hour on Dec 23rd so as not to ruin Christmas too much for the retailers and companies that will suffer most from a hard Brexit. Non vedo l’ora!

Italian banks – should we be worried?

By Gareth Horsfall
This article is published on: 27th May 2020

27.05.20

In this month’s article, I promised I would take a slightly closer look at Italian banks and at what our risks are as deposit holders in banks, which, in all probability, are going to be a risk in the near future as the Italian economy slides further into contraction and a likely deflationary spiral.

But before I go into that I thought a little update on life post-lockdown might be in order. I was hoping to have written more articles during this time, and also send more videos, but after week 3 of lockdown and a decision to do an exercise challenge online every day with some friends and colleagues, I ended up with a herniated disc, a lopsided spinal column touching the sciatic nerve and was unable to sit down for 3 weeks due to the pain (lying down and standing up only). In fact, writing this article is my first attempt at spending any length of time in front of the computer. Well, if nothing else I have learned that I am no longer a spring chicken and need to be a bit more careful about my exercise routines in the future! Other than that, nothing has really changed much for us here, apart from being able to go out more. An unexpected upside of the lockdown has been that Rome without mass tourism is an absolutely beautiful place to be at this time of year. But since schools are still online and the teachers have ramped up the lessons to 4 hours online a day, then there is little chance to do anything other than manage the daily lessons and homework routine. Thankfully only 2 weeks to go and the school season will be over. Then what we do is anyone’s guess! I will keep you posted :0)

OK, so back to some financial news. I want to take a closer look at Italian banks in this E-zine, specifically just what our risks are by holding our cash in them, whether the minimum deposit holder guarantee is really worth anything and what we might be able to do to avoid any potential near and medium terms risks.

To start this somewhat complex journey we need to first look at the subject of Italian government debt: who holds it, how quickly they would be likely to sell it if problems persist and ultimately who would be left carrying the losses.

Domestic v foreign debt holders

Firstly, let’s examine the distribution of Italian government debt between domestic and foreign holders (foreign holders tend to be less loyal and more likely to sell at the first whiff of trouble). There is a widely held belief that the majority of Italy’s public debt is domestic because Italian households hold large financial assets. You may have heard the term ‘Italians are great savers’. This is true and the approximate net wealth of Italian households is €10 trillion, of which about a half, €5 trillion, is in financial assets. This figure is about twice the amount of public debt (before the Covid crisis) and could go some way towards explaining why one might consider the public debt to be covered by the assets and cash that Italians hold in the country.

However, the figures show that Italian households only hold about €100 billion in Italian public debt (roughly 5%) because a much larger part is held by Italian financial institutions: banks, insurance companies etc. whose ultimate beneficiaries, interestingly, are Italian households! This is where our risk lies! As Italian bank account holders, the real risk is that since Italian financial institutions are so heavily invested in the Italian state, a crisis in government could create a potentially bigger crisis in the financial sector.

Other categories of debt

We should also note that public debt also comes in the form of direct loans. Italian banks also have on their books about €290 billion of loans to general government and we don’t know much about the rates charged by banks on these loans. These are mostly issued to Italian local and regional authorities.

A web of complexity

We know that Italian households don’t own a large part of the public debt (directly): it is the financial institutions that hold the lion’s share. Banks alone hold about €400 billion of Italian government debt and if we include

the loans to regional government then their total liability is in the region of €690 billion. This means Italian banks are by far the biggest source of funding for the Italian government and they lend more to the government than they do to small and medium sized businesses. That might explain the somewhat eternally sluggish entrepreneur market in Italy.

We also know banks are supposed to be safe and deposits guaranteed up to €100,000 per bank / banking group (clarification on this point below), but our deposit money is, in reality, an indirect loan to the Italian state.

Another 2 groups who hold Italian government debt are insurance companies (think Generali) who actually take a much longer term view and are less likely to sell in distressed markets, so we don’t need to worry too much about them. The other group is investment funds.

Investment funds are all those funds which you often find being offered by the banks to investors and quite often are loaded with Italian government debt. Those holdings need to be valued daily and will be much more likely to be traded quickly on the back of bad news. Between domestic and foreign investment funds, they hold approximately €750 billion of traded Italian government debt. This might sound a lot, but running into the Covid crisis it represented only about a third of all the Italian government debt in issue, and so even if subjected to frequent trading, it is less likely to have an impact on the stability of the system. Although, in the case of a government default they would be the first in line to take the losses, along with the banks!

The last major holder of the debt is perhaps the elephant in the room: Banca D’Italia.

They owned approximately €400 billion of Italian government debt pre-Covid, and probably a lot more now. However, this is essentially a ‘giro dei soldi’ and

any interest that the Banca D’Italia earns from the Treasury, it immediately pays back. This debt can pretty much be considered Italian government debt. Also, it’s worth noting that the majority of this €400 billion was acquired under the last financial crisis European Central Bank quantitative easing programme, which basically means that Italian government debt is held by the ECB and has the effect of mutualising debt across other EU states. The ECB could raise interest rates on this debt and / or create less favourable payback conditions, but given the state of the EU, economically and politically, this is very unlikely.

How could trouble start in the banking system?

It is at this point that we return to the start and I answer the question (to the best of my ability), Italian banks – should we be worried?

As we have seen, the whole financial system in Italy is pretty much tied up with the state. It’s a clear case of robbing Peter to pay Paul. In addition, the majority of Italian debt is held within the EU, so there are vested interests holding the machine together, maybe with sticking plasters and bits of twine, but it is holding and working. And let’s not be under any illusion that this is just an Italian problem. France, Greece, Spain, Germany to name a few, are in similar situations.

Covid will not ease the situation, but given that a lot of the debt being created to ease the burden across the EU, will in some way or another be spread across it, it would take a pretty big move across global financial markets against the EU or one specific EU state for something major to happen. That being said, we would never have expected Covid to occur and so never say never.

What we can do to safeguard ourselves?
We all need banks for our daily living, and as we have seen in this article, Italian banks are just another appendage of the state. So, the safety of them is essentially a bet on the reliability of the Italian government, which brings me to my most important point. The safety of your Italian bank deposits, in truth, probably relies more on the stability of Italian politics than any other factor and my opinion, for what it’s worth, is that no matter which party comes into power in Italy, things move at such a snail’s pace that it’s hard to find myself losing sleep over my banking arrangements.

Protecting myself

That being said there are some measures to try to minimise my risk. The first being the minimum deposit guarantee of €100,000 per bank / banking group. In all honesty it’s not really worth the paper it’s written on and if there was a widespread run on Italian banks then the state would have to jump in and issue more debt, (which the banks would buy even more of), or the EU would have to step in to hold together the EU project. There are no reserves set aside for a moment like this. However, that being said it does make sense to spread your money if you hold more than €100,000 in cash. The key is in the wording, in that it is €100,000 per bank / banking group. The 4 banking groups in Italy are the Intesa San Paolo group, the UniCredit group, Banca BPM and Monte Paschi di Siena. Look out for the logo of one of these groups on your banking material, or check out your bank website and look at the small print to see if it belongs to one of these groups and if you have more than €100,000 in any one bank or group then think about spreading it. Alternatively, with bank interest rates being effectively negative, consider investing cash to maintain its long term value, whilst always leaving yourself with an adequate fund for emergencies.

Other banking options to look out for are the online bank offerings. I hear many people tell me that they opened up a bank account in Italy when they arrived, either by going along to their local branch and speaking with someone there, or a real estate agent helped them to do it. Most of these accounts are really basic bank accounts with very high charges and if you are a resident, and have an account like this, then consider looking at the online banks in Italy. I am a fan of Fineco bank, with whom I bank with myself. They have excellent terms and conditions and low charges. There are others as well such as Che Banca. Just make sure it is a separate ‘banking group’ to your main bank!

Other than this there is not much more we can do to protect ourselves from a banking crisis in Italy. A banking crisis will evolve from a political crisis and we should see that slow train coming from some way off. I will keep you posted. So no need to lose sleep about it, and concentrate more on getting back to our ‘bella vita’ in ‘il bel paese’.

The Spectrum IFA Group and Blackden Financial join forces

By Spectrum IFA
This article is published on: 26th May 2020

26.05.20

One of Europe’s leading expatriate advisory companies today announced the acquisition of a 50% shareholding in Geneva based financial planners Blackden Financial, the transaction having been concluded on Friday following discussions which began last year.

The move forms part of Spectrum’s ongoing strategic growth in Europe and expands its existing Swiss operation based in Lausanne. Blackden’s name, office and personnel will be retained.

Spectrum, established in 2003, specialises in financial planning for English speaking expatriates across Europe, operating from twelve regional offices in France, Spain, Switzerland, Italy, Belgium and Luxembourg. Blackden (also founded in 2003) operates exclusively in Switzerland from its central Geneva premises, providing investment, pension and savings solutions to a predominantly high net worth expatriate client base.

Spectrum Director, Chris Tagg, commented “Having observed Blackden Financial’s success over many years, we recognise the team’s disciplined advice process, high professional standards and commitment to long term client service. We are pleased to be investing in a company, and in people, knowing that the essential features of good business practice are already in place. We look forward to continuing the growth of our expatriate financial planning services across Switzerland.”

“The stake in Blackden allows Spectrum to further develop its Swiss based expatriate investment and tax planning capabilities, whilst giving Blackden access to locally compliant solutions in some of Spectrum’s EU markets including France, Italy and Spain.”

Chris Marriott, founder and CEO of Blackden, added “Having specialised in advising Swiss based expats for the last 17 years, we are delighted to complete this deal, which complements and strengthens our presence locally, and look forward to Spectrum’s involvement in the next phase of our business development.”

Michael Lodhi, Spectrum’s Chief Executive Officer and co-founder said “I have known Chris Marriott for more than 15 years, we were instrumental in the creation of The Federation of European Independent Financial Advisers (FEIFA) and I am delighted that we can now work together on a commercial basis.”

Central Banks in Italy

By Andrew Lawford
This article is published on: 29th April 2020

29.04.20

Dear All

There is but one topic of conversation in these strange times, and as the crisis unfolds I decided it was worthwhile looking at how the Italian government is responding and considering where we might be heading.

I have decided to produce a pre-recorded webinar in order to provide you with some useful information on the support available to businesses and have even tried to bring a modicum of humour into the arcane world of central banks and economic policies.

Please see the link below for my latest (in truth, my first) webinar.

Are you staying informed?

By Gareth Horsfall
This article is published on: 23rd April 2020

23.04.20

What is your barometer for political talk? Where do you go to get informed? I think most people would say that polls are a useful, if often wrong, source of information, then there are the International Monetary Fund reports, the European central bank forecasts, newspapers, economic reports, financial institution analyses (which are basically economic reports) etc. I worked out some time ago that most of these were self serving and although some of that information is useful it shouldn’t ever be a real gauge for what the average man on the street is really thinking or doing.

For me, I get that information some where else….mercato Trionfale in Rome where I do my weekly food shop. I find it a hub of differing opinions and characters that all have something to say on the state of the country, world politics and the health of their country. OK, I admit it is probably not quite as well reseached as the other methods mentioned above, but I do find it gives a different perspective on what people are thinking.

Pension Transfer from the EU Institutions

However, whilst writing this I stand humbled because I attended a webinar on the state of the EU, which I will write about for you here. The webinar was hosted by a large Assurance company called Utmost and they had as their

guest speaker a man named Ashoka Mody. I openly admit I had never heard of him before but he has a string of book titles to his name, a career at the World Bank and also influence in the EU’s bailout of Ireland in 2009. The reason I stand humbled is because he was a pretty straight talking economist, it would seem. He had very strong opnions on what is likely to happen in the EU as a result of the Covid 19 crisis and particularly how the crisis will develop in Italy, which is, of course, very important to a lot of us.

So without further ado, here goes my summary that webinar and the evolving situation and some of the thinking about the future of ‘Il bel paese’ and the European Union.

Where is the money going to come from?

Let’s start by saying that whatever predictions are currently being made about the financing needs from the effects of COVID-19, the true reality is that it is likely to be a hell of a lot more than we think. It is likely that the global effects of COVID-19 are going to be felt long after the virus disappears (assuming it doesn’t make a return in the winter) and to return to normal the best estimates are that we will need at least 2 years for travel, business and supply chain to return to pre virus levels

At the moment there is little point looking much further than 2020 as this is so unprecedented no-one really has any answers, but the realistic thinking at the moment is that the cost for BOTH Italy and Spain will be upwards of 20-25% of their GDP in 2020. In monetary terms that is a potential €500 billion black hole in the finances of Italy and about the same for Spain.

To look at the viability of filling this hole, we have to turn to the EU. Just last week they announced a potential €500 billion recovery package which, as we can see, does not even come close to the potential needs of the countries worst affected by the virus. So, what do the EU members states really need from the EU now? The answer is not a financing solution because they will never agree a package big enough as we will look at below. What the EU needs now is a political revolution and who would like to place any bets on that happening?

Normalcy: the condition of being normal; the state of being usual, typical, or expected

I am sure you, like me, have concerns about how the EU is going to deal with this and how Italy will extract itself from this mess, but my more immediate preoccupation is what happens to all the small businesses, restaurants, bars, pubs, shops, etc. How are they going to survive this? And I don’t just mean the lockdown period, because any extended set of conditions put on a return to normalcy which will, in turn, have a further damaging effect on the supply chain. The best economic forecasts predict a return to growth for most countries in Q4 2020, but the likelihood is that growth will only return, after a severe contraction for all of 2020 and a return to growth in the first quarter of 2021.

Cogs and Wheels

We have to imagine that the whole world economy is a machine which is comprised of cogs and wheels and for the machine to keep working all the cogs and wheels must keep moving. If one slows then it inevitably has a slowing effect on the whole machine. Not only, but if we imagine the supply chain of a restaurant for example (I choose this because there may be social distancing rules applied to restaurants when they reopen) and

assume that they can only open initially at the capacity of 30-35% of their pre virus levels, then effectively that slows the whole supply chain down to 30% as well. It is not correct to say that it will affect only the restaurants, but also the lavanderia that cleans their table cloths, the food suppliers, the deliveries of detergents, the wine consumption etc. This affect of an extended return to normalcy could be the difference between many businesses reopening and staying permanently closed.

We can extend this thinking globally as well based on different countries coming out of lockdown at different times. If we think about global trade in it’s most basic defintion it is an exchange of goods. A buyer finds a seller and they make an exchange. But, if in the case of Italy, it comes out of lockdown and businesses start again, will they be able to find buyers, or even sellers of their goods and services if other countries in the world, the USA, the UK, Russia, China etc have continued restrictions in place themselves and they can longer trade in the way they did before?

The system is a machine of cogs and wheels which are all inter-dependant on one another. When the wheels stop turning it affects the whole machine.

The ripple effects in the EU?

The first thing to remember about the eurozone economies is that coming into this period, nearly all the eurozone countries were in or near recession.

Italy has been in a low growth, low inflation cycle for about the last 30 years. This crisis is expected to cause respective contractions to the economies of Italy and Germany of -9.1% in 2020 and -7% followed by growth in 2021 of +4.8% and +5.2%. Unfortunately the reality is likely to be much worse.

Italys’ national debt to GDP ratio is predicted to rise to 155% and it could very well fall into a persistent deflation spiral. This is very bad for business, the economy and the country as a whole because it will exacerbate the effects of the debt meaning that Italy has to pay even more back to meet it’s debt obligations in world financial markets, meaning less investment in infrastructure schools, hospitals, and public services. Could we see even more forced privatisation of public utilities and services?

In short this is a very bad situation!

As I also explained above, the effects will not only be isolated to Italy and Spain, but the rest of the EU. For example, French banks have lent approximately €300 billion to Italian banks in recent years. Italian banks are almost inevitably going to wobble after this crisis and we might have to expect some bank failures (the subject of my next E-zine). But, if they default on their obligations, what will be the ripple effect on French banks? And French banks are not the only banks that have lent to Italian banks in recent years. Also, Greek, German, Spanish, Portuguese…can you see the trend?

So how will the EU deal with this crisis?

The short answer is don’t expect anything from the EU. It is likely that we will see a new idea almost every day in the press but none of these will solve the problem because one the single biggest failure of the EU project. No political alignment. We cannot fix a financial solution without first having a political solution, because any political solution ultimately means that there will be a fiscal transfer from one country in the EU to another, and neither the Dutch nor the Germans are willing to take that risk.

The European central bank already owns 23% of Italian government debt and to bear the cost of the Covid 19 breakout it would need to purchase another 25%, meaning that the ECB would be holding nearly 50% of Italian government debt. If we remove the morally right thing to do for a moment, it is perfectly understandable that the Germans and Dutch would

not want to be on the hook for this amount of debt should Italy fail to pay its debt obligations in the future, because of its inability to manage its economy.

National interest will always come first, over EU solidarity. Let’s bear in mind that Germany is also going to have to apply it’s own fiscal stimulus and if EU bonds were created then that would mean a transfer of approximately €200-300 billion euros of government debt transfer from Italy to Germany alone. It might be the morally correct thing to do, but is it the practical thing to do?. Is it right that other EU states should shoulder the burden of debt from less efficient Southern European states?

A quick look at history

You may think that these are historically unprecedented poltical times, but you would be wrong. We only need to look at the USA to see what happens when no political union is in place:
Between 1776 and 1789 the US was like Europe is today. It was a group of federal states that all operated their own finances and budgets. This was also the time of the War of Independence from Great Britain. In 1788 a currency union was formed and the US dollar was granted as the common currency across the USA, allowing them to spend without the worry of exchange rates. Following the currency union a federal government was formed in 1789. At this point the federal government now had a right to tax the nation. However, this led to a fractures between individual states, principally those in the north and those in the south and lead to the American civil war in 1861 – 1865.

So there we have an example of a similar situation as that of the EU, but with one major difference: The EU doesn’t have a federal government in place and without a federal government, (but a currency union), then the central bank (the ECB in the case of the EU) does not have the authority to bail out the individual member states in the time of need. In other words the central bank cannot play it’s role of being a lender of last resort. Herein lies the problem.

In the USA, as we have already seen in past weeks, they will essentially ask the Federal Bank to print as much money as is required to bailout the nation. If they lend to any institution, municpality or corporation and that entity fails to pay their debt obligations then the

taxpayer will bear the burden for that debt and it will be added to the governments existing debt obligations, which they can then, over time, work to payback or erode through inflationary measures.

taly, as per all EU member states, have no lender of last resort, (independent central bank) to which they can turn to bear the cost of the measures introduced during the Covid 19 outbreak.

So where do we go from here?

Well, it is quite clear that this is going to swiftly move from a health crisis to an economic crisis and then even more quickly to a political crisis.

There seems to be no political will in the EU to create EU Bonds to alleviate the burden on Southern European states who were most severly affected by Covid 19. The only solution being offered at the moment is to extend the European Stability Mechanism to Italy, Spain and other affected states which is ( without going into details) an offer of loans at low to zero interest rates, but which must be paid back and with conditions attached. This is something which Italy is going to try hard to fight against. This isn’t a financial crisis but a health crisis and they believe, and I am with them despite the financial and political consequences, that the EU must bear the burden of the additional debt created because of this crisis. Italy does not want to take loans with conditions attached because it is essentially the same financial treatment as that imposed on Greece in 2010. The only outcome from that was complete financial hardship and a failing economy. Italy is, obviously, keen to avoid the same fate as is Spain.

So that leads us nicely to the term which we are likely to see in the press in the coming weeks and years ahead: QUITALY.

Is Italy going to decide to do a Brexit and leave the EU. Before any Brits, like myself, who have taken citizenship in recent years, start to panic about the possibility of Italy leaving the EU as well, it should be noted that the Italian constitution would prevent a hasty and

quick action, (They couldn’t do a Brexit!!) and even if they were to hold a referendum on the matter it would take years of negotiation within the warring Camera dei Deputati and Senato to even arrive at a referendum.

So we have a long way to go yet, but one thing is clear. Political opinion is changing in Italy. In recent surveys 42% of Italians said that they didn’t want to leave the EU, but an equal percentage said that they would want to. 50% of Italians said that they did not want to take any money from the European Stability mechanism if it came with any conditions attached, but conditionality will be key to the future of the EU, and the economic health of Italy.

As you might imagine at this time, this is stoking more populist revolt and Matteo Salvini is now number 1 in the polls. The Frattelli D’Italia led by Giorgia Melloni ( who is a far right party allied with Salvini’s, La Lega) is also polling well and her ratings are rising fast. It is not beyond imagination that when the Covid virus passes, a political crisis will quickly ensue, Conte and the M5S coalition will hold on to power by a thread but a Salvini / Melloni coalition could be very quickly ushered into power in the not so distant future. Prepare yourselves!! I can only add that my conversations with Italian friends, people I chat to at the market and with some clients has turned from being very EU positive to negative. One of my clients probably hit the nail on the head when he said, “if the EU cannot get their finger out on this one, then I can’t really see the point of a politically unified EU anymore and it should return to it’s roots and become merely a trading block, with freedom of movement). I am inclined to agree.

What can we expect?

The Eurogroup [the group of EU finance ministers] is meeting on Thursday 23rd April to discuss the future. Conte will be meeting with them to try and negotitate a good financing outcome for Italy.

The likelihood is that the EU will do what they are good at and kick the problem into the long grass. They will not provide any concrete solution, which will throw Italy and possibly Spain into a spiral of recession, deflation, more political infighting and economic hardship. The Eurogroup only has €500 billion euros at it’s disposal to provide unemployment insurance, economic stimulus, and the fight the Covid 19 virus across the EU. It is nowhere close to the amount required. The ball park figure would be closer to a € 1trillion. The sad fact is that the European Central Bank could print € 1trillion euros, if only it had the mandate to do so from all EU member states.

In truth, Germany will likely have the last say. Brexit has already left a funding hole of approximately €60 billion in the EU budget and so the logical conclusion is that Ms Merkel will give the problem the kiss of death by requesting that the issue of funding is placed in the EU budget and each country will be left to fight it out with other member states as to who pays what and when. In others words it will fall into the bureaucracy of the EU. The problems will persist in Italy and economic hardship will worsen.

So what does this mean for our money

Well, to try and leave this E-zine on a positive note for investors, at least, we can be thankful that there is a whole world out there in which we can invest and whilst Italy likely sees hardship, other countries will exit this crisis and proper. One country that springs to mind is China. So for all our concerns about the country that we live in, we shouldn’t worry too much about our money. I can’t say for sure when stock markets will recover fully. We may be waiting until the end of this year at the very earliest, but they will and with a well managed, diversified portfolio with good oversight, then your portfolio will recover as well. The economics will play out over a much longer period. One upside for currencies is that it could weaken the Euro which would make those who have assets in USD or GBP, for example, worth a lot more. Maybe a return to the heady days of 1:45 GBP to 1 €?

All I can say that it is all to play for. In the meantime, I will be taking a closer look at Italian banks in my next E-zine as they could be a huge risk to use, and to financial markets in the months and years ahead.

Why do we use asset managers?

By Gareth Horsfall
This article is published on: 10th April 2020

10.04.20

In this article I would just like to touch briefly on a subject which, during the good times might seem somewhat banal and maybe even pointless, but when we hit the bad times we can see the merit of why we use asset managers such as Rathbones, Tilney, WHIreland and Cazenove to manage our clients’ money.

During this time in lockdown and financial market instability, I have been listening to a number of webinars from investment managers and financial gurus to try and understand what they think is likely to happen when we exit this crisis. Below are some of the points which I have heard:

Within the next 6-12 months dividends from some of the best dividend paying companies will be slashed or even cut completely, to shore up cash reserves.
Even more focus will be put on the way we live and the way companies operate. We could see an even greater resurgence into ESG (Environment, Social and Governance) stocks. If you are unsure what they are then you can check out the article I wrote on this earlier this year.
We may have seen the bottoming of the markets, but much depends on what will happen in the USA. As it stands, almost 7 million people have already applied for unemployment benefit. If that rate continues it means the US will have an unemployment rate of approx 15% very soon. A level not seen since the Great Depression in 1929.
Any early plateau’s in the infection and death rate in Europe will be a good signal for financial markets.
Companies who were struggling to survive prior to this crisis will likely collapse. A great example of this is the UK retailer Debenhams which, as I write, has just brought the administrators in to look at winding the company up. However, the new tech savvy companies that have responded to changing customer trends will strengthen their position as market competition fails.
Nationalisations are likely, more so in the EU than the UK and the USA. Companies in the travel, retail, and leisure sectors are at the greatest risk of being nationalised. Part nationalisations are a huge drag on company performance and would be areas to avoid when the dust settles.
Smart working could become popular. Companies may start to change their attitude towards office space and allow more smart working for their employees. This could mean potential productivity increases but may also change the dynamics of the property market as well, mainly in the cities.
Is Capitalism dead? A subject which seems to be thrown around whenever we have a crisis. Actually the thinking is, not at all. In fact, one manager thought that there was likely to be a resurgence of ‘responsible’ capitalism. A capitalism that is no longer unfettered, but is more controlled allowing prosperity to grow, while at the same time focussing on our care of the environment, social care and supervision of corporate governance practices. Will we ever be weaned off this perpetual standard of prosperity and GDP growth, which is unsustainable in so many ways?

It is worth just going back to point 1 for a moment, the point about the dividend cuts, and why I entitled this section:

Why do we use asset managers?

Many clients rely on income from their investments to fund their lifestyle. That may include ad hoc withdrawals or regular payments to top up pensions, pay for healthcare costs, pay for schooling fees, and general lifestyle costs. If this is the case, then relying on what has been the traditional investment type for income: bonds and blue chip equities, might be a difficult strategy post crisis.

Now, more than ever, there is likely to be a need to take income from gains in the asset prices, rather than exclusively income derived from those same assets. (Think about it as a property that is rented, but after expenses and taxes earns very little income. However, the property itself has gained in price significantly and you could access those gains to help top up your income! A bit like an equity release plan)

The importance will be to be in the right assets at the right times, to sell the gains when they have been made and secure them as a reserve to pay income payments. If you imagine that most of the major companies could be cutting their dividends to hoard cash to survive this period, while in addition interest rates on cash are likely to be cut even further and the interest rate on bonds are equally likely to fall due to easy access to government cash, then where else can we turn to generate the cash we may need? We must turn to the gains in the prices of the assets that we hold as an alternative way to generate income. This is where the expertise of asset managers comes into play. They research the market, and aim to be in the right geographical and corporate sectors at the right times and look in depth at company balance sheets to predict their future.

It’s going to be a tricky time ahead for many people and relying on tried and trusted methods of generating income that have served you well in the past may not necessarily work in the near term.

I am happy to say that all our clients are with asset managers who we trust to manage our clients money and make sure they have the income they need in the good times and the bad.

Investment Talk

By Gareth Horsfall
This article is published on: 9th April 2020

Let’s talk about our money for a moment. I know it has been the last thing on anyone’s lips in the last few weeks, but as the spread of the virus slows and when life slowly gets back to normal we will start thinking about our financial situation again, and rightly so.

As I am sure you will have noted, in the last few weeks the stock market tanked, strangely predictable in its unpredictability. That probably makes no sense at all (and I am sure the editor of this Ezine will question me about it!) but the history of financial markets shows us that the crashes come from unforeseen events which incite a huge sell off. At the time of writing a rebound in various markets appears to be taking off. How long it will last is anyone’s guess. However, a longer and sustained rebound will come quite quickly and so it is important to remain calm, stay invested and benefit from the upside as well.

(As an aside, I would ask that you start to look at your account balances now. We have a tendency to not want to look at our investments during the difficult times and whilst I agree with this at the height of the crisis, when the dust settles, and it is starting to from a financial market perspective anyway, I always coach that it is important to check your money. If nothing else it helps us to understand the phases of investments and how they are nothing to worry about. We can’t always have good news!)

We can see from the examples below what happens after market crashes and why sticking with the plan is more important than trying to time our way out and back in again.

A few examples from previous financial crises:

2008
2009

The collapse of the subprime mortgage markets triggered a recession and made 2008 the poorest year for stocks since 1931. The US market fell 10% in June 2008 and fell 10% again in October 2008, losing 19.12% for the year. On March 9, 2009, the major U.S. indices closed at 12-year lows. Then, the market took off for one of the greatest rallies. From the March 9 2009 lows to the end of 2009, the US market soared 64.83% while the NASDAQ (Tech stocks index) gained 78.87%.

2001
2002

Was much the same. After the four-day closure of the stock market following 9/11, the US market lost 14.26% in a week. But what happened next? A huge gain. The market rebounded 21% in less than three months.

There were more challenges ahead because on October 9, 2002, the US market fell again but by Halloween, a period of only 22 days, it gained 10.6%.

2003

The US market gained 26.4%, and the Nasdaq 50%.

If we go back further the story is always the same. When the markets crash, reference is almost always made to October 19th 1987: Black Monday. (This time was no different.) The US market lost 22.6% in one day! Then the recovery kicked in. During the next two trading days, it gained back all of the loss ending up 2% positive for the year.

If you had invested in the US market a week before Black Monday, you would have lost 30% on your investment in the crash … but if you held on, your investment would have gained 462% over the next 20 years.

1974

With investors fretting over rising inflation and the energy crisis, the US market lost 30% of its value during the first three quarters of the year, but then it suddenly gained 16% in October.

Between 1982 and the year 2000 the US market made a 1,500% gain. This is why we stay invested through the downturns. This is what the market is capable of achieving. There are periodic rollercoaster rides, but these are normal and they should be expected. Even with these nailbiting rides history is definitely on our side.

The debt situation in Italy

By Andrew Lawford
This article is published on: 25th March 2020

25.03.20

I’m not entirely sure if I’m writing my first Spectrum article at what amounts to an auspicious or inauspicious time. Certainly I didn’t imagine that I would be writing it in my current circumstances, which essentially amount to being under house arrest. Many of the people reading this will be in similar circumstances to me, and those of you who aren’t risk becoming so over the coming weeks.

Generally on these occasions we feel the need to say such things as, “I hope you are all safe and well”, but I think this goes without saying. All of us have some friend or family member who is in the high risk category, so what I will say is: for those of you at high risk, be careful. For the rest of us, let’s be aware that things could be worse for us personally and keep a lookout for people who may need some help.

It would have been nice to have started out by writing something positive about Italy, but the current situation brings into sharp focus the vulnerability of the Italian economy to external shocks. The debt situation in Italy propagates a fragility that becomes disturbingly apparent at times like these. Put simply, when you are up to eyeballs in debt in normal times and a crisis hits, you don’t have any flexibility to withstand the shock.

Since I moved to Italy in 2004, this has been the
evolution of the debt situation:

I find it astounding that Italy has managed to accumulate almost 1 trillion euros of extra debt over the last 16 years, a period in which GDP has increased less than half that amount. Each and every initiative to realign the government accounts has failed miserably, as evidenced by the graph below (source: www.mazzieroresearch.com):

What this graph shows is the annual budget forecasts (and updates, when announced) for the evolution of the Debt/GDP ratio over the years following the forecast (these are the dotted lines), compared with what has actually happened (the solid red line). The bold blue dotted line is the current forecast, but it’s fairly clear that the current crisis will lead to a drastic change in this.

How much of a change is an interesting question…
Let’s consider that the latest declarations from the president of the Confindustria business lobby group, Vincenzo Boccia, estimate that roughly 70% of Italian productive activity is closing, so something like 100 billion euros a month of lost GDP for the duration of the current period of “lockdown”. All of this leads to the certainty that tax receipts will drop off a cliff, either because no tax is due (or some kind of “holiday” is given), or because companies and individuals simply don’t have the money to pay. This is happening at a time when the government will be called upon to increase spending, both to respond to the direct costs of dealing with the healthcare emergency and to give some support to businesses and workers (through cassa integrazione (temporary support for idle employees) or support payments).

So if we assume a drop of 70% in tax receipts and an increase of 20% in government expenditure compared with 2019 levels, you get an annual deficit for 2020 of 550 billion euros (in 2019 the deficit was 67 billion). So we are possibly faced with a 40 billion euro hole to fill each month compared to Italy’s normal situation. Almost 700 euros per capita, per month. If the whole year continues this way, we end up with a Debt/GDP ratio of around 165%, and this is on the generous assumption that GDP rebounds immediately to 2019 levels.

Given the above, it is not surprising to hear renewed suggestions that the EU should start issuing European bonds. Over the years, since the financial crisis of 2007/08, the weaker countries of the EU have sometimes tried to suggest that true European bonds should be issued by the Union, which would have the effect of explicitly making the more virtuous members (especially Germany) jointly and severally liable for debts of more profligate members such as the PIIGS countries.

This time, it is being suggested that these bonds carry the alluring although somewhat morbid title of a “Coronabond”. Good luck getting that one past the Germans, even if the proposal is only to issue such bonds as a temporary measure to generate support for those economies most heavily affected by the current crisis. Most politicians understand instinctively what economist and Nobel prize winner, Milton Friedman, once said: there is “nothing so permanent as a temporary government programme”. Once you’ve issued your first European Bond, how will you be able to say no next time?

So what does this terrible situation mean from a financial perspective for your average Italian resident with some savings and investments? Given that most of us have a bit more time on our hands than usual, it might be an idea to have a proper look at your situation and ask some of the following questions, although you must only do so without panicking and without jumping to hasty conclusions:

How are my investments holding up compared with the risk expectations that I had at the time the investment was made? If, as is probable, there are some unrealised losses in my portfolio, am I comfortable that the current situation isn’t putting my overall financial situation at risk?
Where and how do I hold my assets? If they are all deposited in one bank or in one country, is it worth looking at diversifying my country risk? Banks are generally only considered as strong as the country they are based in (and they generally hold piles of government debt), so credit-rating agencies will not give a higher rating to a financial institution than that given to the sovereign nation it is based in.
If I have been a cautious investor up until now or have hoarded cash, should I look at increasing risk given the falling values in the market?
If I have invested aggressively and am now sitting on losses, how are my nerves holding up and am I framing any discussion on the subject in the right way?

If any of the above questions resonate with you, then now might be the time to have a chat with me. At the minimum, it can be reassuring to discuss any situation in which you find yourself unsure of the consequences. My colleagues and I can help to bring focus to the important issues and cut through the noise generated by the crisis. Peace of mind can only come through analysis and understanding. Hope is not a strategy and neither is reacting on gut feelings or emotions generally.