I thought I would write about the colour yellow in this E-zine.
I never knew how much I liked the colour yellow. It had never really come on my radar until Lazio moved into ‘zona gialla’ again on the 1st February.
I thought I would write about the colour yellow in this E-zine.
I never knew how much I liked the colour yellow. It had never really come on my radar until Lazio moved into ‘zona gialla’ again on the 1st February.
This lockdown has been quite challenging in many ways but it has really made me appreciate the small things which enrich our daily/weekly/monthly lives and break the daily monotony. For me, it’s those meals out with family, friends and clients, those mid-week trips to the cinema to see a film that has been newly released or a special theatre trip because some performing artists are in town. And I have to admit (I never thought I would ever write this) that I actually miss those kids parties when the parents lurk around at the back of the room talking and the fathers sneak off to have a beer or a glass of wine (or 2). Oh, and not forgetting those little trips, overseas or in Italy, that have been off the table now for sometime, but are the icing on the cake of life. I long for the day when I can make, even short trips away, with the family and friends again.
Anyway, enough of my Covid colour thinking.
Well, if you have missed it, there is a new technocrat government in Italy. This time under the supervision of Mario Draghi. For anyone who is unfamiliar with Mario Draghi, he is the last ex-President of the EU Central Bank, previous head of the Bank of Italy, previous economist for Goldman Sachs and has also worked at the World Bank. If you are interested, he also has a house somewhere near Citta delle Pieve, Umbria.
What’s interesting about this appointment is that he was the man who pretty much stopped the EU crisis of 2012, merely by announcing that the ‘Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough’. With those words he stopped the attack on Spanish and Italian government debt, being launched at the time by the worlds financiers, and prevented a complete meltdown when Greece was also in fear of default.
There is no doubt that ‘Super Mario’ (his other widely known name) is a very adept politician and economist who has the ability and knowledge to get Italy out of it’s current predicament, as a result of Covid.
It was Matteo Renzi who pulled out of the coalition which was keeping Giuseppe Conte in power and managing the Covid crisis, but Renzi being a ‘supposed’ pro-business politician didn’t think that Conte had the ability to manage the €266 billion Recovery fund which is shortly arriving from the EU, and which will be used to help rebuild the economy. I happen to agree (although I think Conte has done a good job of managing the pandemic in Italy) and also believe that Mario Draghi is probably the best person for the job.
However, to what extent he will be prevented from doing so by the warring parties is anyone’s guess. He is a no nonsense economist/politican and has already made it clear that he wants to surround himself with capable people, and not politicans who are looking to advance themselves or their parties.
I suspect he will get some new and interesting projects approved by Parliament, but like the technocrats before him (Letta and Monti), will eventually be stopped by the other political parties who will want to merely push their own agenda and take power.
But, let’s not take this step for granted because if Mario Draghi is given enough leash to enact some serious recovery plans, and real effects can be seen, then they may give him more leash than we might expect.
My thinking is that alot of the burden will now be placed on his shoulders, and should he be able to magic the economic bunny out of the crumbling Italian economy top hat then the other political parties will quickly amass like children around a fresh birthday cake, to benefit from his good work and look to ultimately grasp power and take all the credit.
It’s all to play for. I shall be watching this one carefully. I think like most of us who have been living in Italy for quite some time, we really hope that something significant happens because we see so much potential for change.
UK Offshore territories
For anyone holding money in the UK offshore territories: Jersey, Guernsey, Isle of Man, British Virgin Islands, Cayman Islands etc, you should be aware that the EU voted to put these territories back on the EU black list as of the 1st February 2021.
I suspected that this would be the case once the UK lost its protected status in Brussels and these territories, which depend on the UK, have been now put back on the EU’s black list. Essentially this means that they do not share adequate financial information and lack sufficient fiscal transparency. By keeping arrangements in these jurisidctions you will be subjecting yourself to punitive tax rates as a resident in Italy.
If in any doubt then you can always contact me on +39 3336492356 or on email email@example.com
Letters from the Agenzia delle Entrate
Someone forwarded me a forum discussion chat the other day which was discussing the fact that British citizens around Italy were receiving letters from the Agenzia delle Entrate and being targeted in a campaign for undeclared finances.
Firstly, I should say that I do not have any insight into what the Agenzia delle Entrate (AdE) is doing or thinking, but can only hypothese based on past experience.
One thing I think it is fair to say is that I don’t think that the AdE is actually targeting British citizens living in Italy as a result of Brexit. What is more likely the case is that the AdE are doing what they do most years, at the start of the year, and send out standardised letters to foreign citizens resident in Italy with the hope that they will pick up somebody who has undeclared income/assets and/or gains.
I myself have received 2 of these letters in the past. The first proved to be a mistake, the second however, put me in such a panic that I went back over my finances for the previous year with a fine toothcomb and realised I had mistakenly failed to declare a small dividend payment in the UK, but it should be said that there was no mention of this error on their letter. The letter itself was a standard letter merely saying that as a result of information gained from the exchange of information between tax authorities, it was ‘believed’ that I may have undeclared assets/incomes and/or gains and that I needed to regualrise my affairs. It was enough to make me look back over everything and get everything ‘in regola’ .
I know that in the last few years the Italian authorities have become more sophisticated with the information that they have received and so should you receive a letter with specific figures mentioned, then I think it is fair to say that you have been caught and you will have to provide the information requested. It would also make sense to get a commercialista to help submit the information and negotiate with them on your behalf, if required.
However, if you receive the generic letter then it could just be that they are on a ‘fishing’ mission. Setting a cat amongst the pigeons, pick one off and the rest become so much more wary. In my opinion, any letter from the Agenzia delle Entrate should not be ignored. It could certainly be the case that they are party to information which has been shared by tax authorities in other countries where you hold assets and so to ignore such a communication could land you in very hot water indeed.
My simple message for anyone, to prevent ever receiving a letter from the Agenzia delle Entrate is
‘If in doubt, declare the account’
(And don’t forget your other worldwide assets/gains and income too)
Imposte and Tasse
Do you know the difference bettwen your ‘imposte’ and your ‘tasse’?’. In English they are both taxes, but in Italian they have different meanings and so it is probably a good idea to understand what the difference is.
Tasse are taxes which are collected to fund a specific part of the Italian state. A good example is TARI (Tariffa sui Rifuiti) or even airport taxes. They are collected for the purpose of funding a specific part of the Italian state infrastructure.
Imposte,on the other hand, are generic taxes which are charged but which have no specific objective in mind, other than to fund the ongoing cost of the Italian state. These would include things like IRPEF (income taxes) IVAFE (wealth taxes) and IVIE (a tax on property).
So, the next time you have a chat with your commercialista, or when you are chatting in the bar about how much we have to pay in taxes in Italy, you can make sure that you use the right terminology for the correct type of of tax!
I normally like to start a new E-zine or article with a story or some kind of recent experience to try and provide context to what I am about to write. However, because of my lack of travels, I am lacking stories at the moment. In fact, I am now starting to believe that there is a government conspiracy to bore me to death, or they are in collaboration with Netflix to lobotomize me with endless series and films. Lockdown phase 2 is proving somewhat monotonous!
So, with the fact that there isn’t really much to tell you other than work related matters, then we might as well crack on, because the truth is that as a result of Brexit a number of financial things have changed. A lot of my clients are now non-EU citizens (i.e. Brits), and so a better understanding of Italian tax legislation is essential. We have done some extensive digging in this regard and our investigations have sprung up some unwelcome news for some.
The information we found was buried so deep in Italian tax law text that it took us (in reality my colleague Andrew Lawford ended up discovering it through sheer determination and persistence) quite some time to dig it up. So make sure you read the whole E-zine as something might be relevant to you.
I should add that the financial services industry is still trying to work itself out and we should remember that there is no deal for financial services as part of the Brexit trade agreement. A lot of hope is being placed on a potential trade agreement being reached on financial services by the spring, as professed by Rishi Sunak, but I have my doubts.
SO, WHAT ARE THE CONCERNS?
Let’s start with the one that got the most press leading up to Brexit. The automatic closure of UK bank accounts for EU residents.
There is not much to say here, other than the main culprits seem to be Barclays, Lloyds, Nationwide, Royal Bank of Scotland and Halifax. To date, my experience with clients is that the closure letters are a bit of a scattergun approach. Not everyone I know with an account in these banks is being approached to close it.
I am asked a lot about the possibility of using a UK address of a relative or friend and whether this would alert the bank to you living in the EU or not? The likelihood is that it will for 2 reasons. The first is that under the Common Reporting Standard (International sharing of tax and financial information) banks only need to ‘suspect’ that you are resident in another country. This might be determined from activity on your account, or other financial information that they may receive from foreign tax authorities. The second reason is that ultimately you should be asked to prove the address you provide. A simple check on the land registry can avert them to the fact that you are not the registered owner of the property. A standard requirement is to request a copy of a utility bill showing your name and address on it or some kind of official tax authority document. If you are unable to prove these, then the chances are that the banks will catch up with you sooner or later.
So, what are the alternatives? I have recommended Fineco as a good Italian bank alternative (for transparency purposes, I have been an account holder for approx 10 years) but I believe that more of you than ever are finding it easy to open and use Transferwise as a transitionary online solution. But it’s NOT a bank, so beware! There are online banks as well, such as N26 and the online offshoots of the regular Italian banks. There are certainly lots of options available although finding a non-UK alternative that will allow UK direct debit payments is pretty much impossible.
UK PROPERTY OWNERSHIP
I have written previously about this and the increased wealth tax that will now be charged on UK property ownership for Italian residents.
To recap, in a pre-Brexit world a UK property owned by an Italian resident would have had a wealth tax charged against it each year, in Italy. The value for calculating this charge was 0.76% of the council tax value of the property. This is considerably lower than the market value in most cases. However, now that the UK has left the EU the method for calculating that wealth tax changes.
Properties that are located outside the EU are subject to the same charge, 0.76%, but in this case the valuation basis moves to the purchase/acquisition value of the property, where provable, and the market value otherwise. For most people I am finding that this is quite a difference, and for anyone who has bought in the last 10 years or so, this means a mostly, higher annual wealth tax charge. To date, I have only come across one person who retired to Italy and had retained the family property in the UK for many years, and could benefit from a very low purchase value for calculation purposes, hence a net tax benefit as a result of the tax change post Brexit. Most are going to find that their cost of holding UK property will increase as a result of the UK leaving the EU.
For anyone inclined to sell their UK property then we shouldn’t forget that there is the possible ‘sale-of-home’ tax break as an Italian resident. If you have owned the home for more than 5 full tax years then Italy does not consider a property sale speculative (even a property located overseas) and so no capital gains tax is charged in Italy. You may have tax applied in the country in which the property is situated, in which case you would need to check the local tax laws. In the case of the UK, a property sale as a non-UK tax resident means capital gains tax would be charged on the property, but only from the date at which the legislation was introduced: 6th April 2015. What this means is that any gains made up to that point can effectively be written off, and the cost value for the purposes of calculating the capital gain would be the value as at the 6th April 2015 or later, depending on when you bought the property. A handy tax break for anyone who has held property in the UK for more than 5 years.
Now, we come onto the more technical points and an area which I see evolving over the coming year/years: UK IFAs (Independent Financial Advisers).
Even when the UK was inside the EU it was not uncommon for me to come across people who had existing relationships with UK based IFAs who advised them on their finances, in the same way that I do for my clients living in Italy. But, even inside the EU most firms were not licensed to work with clients who were living in an EU state (it was easy enough to check on the Financial Conduct Authority website in the UK), and even in the few limited cases where they had the licence they did not have any experience of the Italian tax and financial system, so their advice was mainly useless and normally bad for the client. However, many continued to operate regardless, protected (loosely) by being a member of the EU.
Fast forward to a post Brexit world and the fog has cleared. If you are working with a UK based IFA, and living in Italy, then you should not be receiving any advice from them. They will not have the necessary authorities or licences to operate in the EU, and as such, you as a client are not protected for any advice that they give you. This has been very clearly highlighted in a Banca D’Italia document which was released at the end of last year.
If you do work with any UK based financial professional it would be in your interests to contact them and ask if they have an EU based entity to ensure they can continue to work with you. In much the same way as the banks are pulling out of the EU (the ones that have no intention to develop or maintain their existing EU business), IFA firms (small or large) should also be doing the same.
I have to admit, that I have benefited from this because a number of UK firms with Italian resident clients have already contacted me about passing on their clients because they are no longer able to work with them. I expect this to continue as more firms understand their legal liability of working with clients in an un-licensed capacity.
If you are in this situation please speak with the firm and/or send me a message and I can help you to look into it in more detail.
This is a category, very similar to UK based IFAs. These are firms which generally manage sizeable portfolios for clients and have a direct relationship with the end client. To date there are mixed messages coming out of this sector. Some asset managers are aiming to pass EU based clients to EU based firms, like ourselves, others are clinging onto various legal loop holes to retain business. If you have a portfolio managed by a UK based asset manager directly, then the best you can do is to contact them and ask them what their post Brexit plans are. We expect that over time the EU will develop a more protectionist and hardline stance on working with non EU based firms.T his will ensure that they can more readily protect their EU residents and citizens and also win business from the UK.
Where UK asset managers are used inside Italian tax compliant accounts, in the way that we mostly structure assets for our clients, then you do not have to worry as the provider of the account will be keeping abreast of legislation as it changes.
***For all my clients, please be aware that we are on top of any changes in this regard and you do NOT need to contact your asset manager as a result of the content in this E-zine. If anything changes we will notify you as soon as we become aware. We also have contingency plans in place should any changes need to be made***
TAX ON UK DOMICILED ASSETS
This is probably the most revealing piece of information that we have discovered, and whilst it is new for UK residents, it has always been the tax case for other non-EU Italian residents e.g. US citizens. And very important information it is as well for the holders
of UK domiciled non-property assets (excluding bank accounts).
We are not sure if most commercialisti are aware of what we discovered and so we encourage you to have a discussion with yours if you think you might be affected!
Essentially, if you hold non-EU approved investment funds in a portfolio with a bank or an asset manager, then these same assets must meet 3 simple rules for the flat 26% tax treatment for investment income and capital gains to be applied, in Italy.
1. The fund or collective investment must be established in a member state of the EU or EEA
2. It must be sold in Italy under the relevant distributions guidelines from the regulator CONSOB
3. And if you are working with someone who manages your money they need to be subject to EU authorisations in the country in which they operate from
And the important point to note is that any investment fund must be covered under all 3 criteria and not just one!
What is the consequence if your collective investments don’t meet these criteria?
Very simply all your investment income and capital gains are added up and taxed at your highest rate of income tax! They are added to all your other income for the year and taxed accordingly. For someone who is earning up to €15000pa (pensions, rental income and/or employment income) then this would be advantageous, but for any figure above then your tax rate will be higher than the 26% currently charged on the same asset.
How can you check if you have a non-EU domiciled collective investment asset?
Very simply, all securities are allocated an International Securities Number (ISIN code). You will need to check that yours starts with an EU approved code, such as IE, LU, FR, IT etc. For any UK citizen living in Italy holding securities/funds or assets, whose code starts with the letters GB, then it might be time to take another look at your financial planning as a resident to try and mitigate any future tax charges on these assets.
And that’s it for this E-zine! There are quite a few financial planning considerations to be taken into account here and so I will elaborate on them in future E-zines, but if you have any doubts as to whether any of these topics may apply to you, or want some help looking into anything, then I would suggest you get in touch using the form below.
ARE YOU UNABLE TO SERVICE THESE CLIENTS POST BREXIT?
At The Spectrum IFA Group we can look after your clients long term as licensed and regulated financial advisers operating in Italy.
The things you should know before you contact us for our help:
As the end of the transition period is rapidly approaching we ask that you contact us as soon possible to allow time for us to complete any necessary restructuring of client assets.
If your clients are resident in the EU or Switzerland, or intending becoming resident, please feel free to contact us for a no obligation discussion to determine if we can look after your clients post Brexit.
You can contact me at firstname.lastname@example.org
There is nothing like a cold snap to focus the mind and it certainly arrived with a bang this year. In Rome we lost about 20 degrees of temperature in a week. However, I have to confess that I am rather glad that the autumn months are now upon us because the prolonged hot temperatures play havoc with trying to be productive.
In this article, as you will see, there are a number of shorter topics, but ones which I think are relevant for our lives in Italy. During the summer I have been scanning the financial papers and the ‘norme e tributi’ pages of Sole 24 Ore to see what might affect our lives in the future. Fortunately, the Italian government seemed to give us a break this year and I didn’t find much of significant interest. However, a number of other matters have arisen in the last few weeks
Let’s start with one of the more interesting matters that arose during the summer. I was contacted by a client who was enquiring about taking money out of her QROPS pension (a QROPS is a UK pension that has been moved away from the UK but still operates like a UK pension – useful when living abroad!).
I have always advised my clients that any withdrawals from a UK personal pension are taxed at income tax rates in Italy, but over the last few years I have come across a number of clients whose commercialista has been declaring the pension as a ‘previdenza complementare’. This is the Italian equivalent of a UK personal pension. The main reason for choosing this route seemed to be a preferential flat tax rate of 15%. My argument has always been that the 2 structures have fundamentally different characteristics and therefore a UK personal pension should be considered an irrevocable trust, hence withdrawals are subject to income tax. In fact as far back as June 2018 I wrote the following in an article:
I have heard stories from various people over the years that their commercialisti declare their UK pensions as ‘previdenza complementare‘, which loosely translated means complementary pension. However, the definition does not accurately complete the story. The reason for declaring it in this manner is that it is taxed at a preferential tax rate of 15%.
I must admit here that I don’t think is the correct way of declaring income from an overseas pension / retirement plan. The ‘previdenza complementare‘ is a vehicle used in Italy to complement the pension which is offered through Italian social security (INPS). You may argue that this has the same purpose as that of an overseas pension fund. However, this is where the similarities end.
In the case of a UK pension fund your contributions would attract tax relief during the accumulation phase. In the ‘previdenza complementare‘ (PC) the fund is taxable during the accumulation phase. The UK scheme is also not linked to the state scheme in any way and you can withdraw money from age 55 (personal pension) or scheme retirement age (occupational pension). The PC is linked to the Italian state retirement age. Lastly, since the contributions into a UK fund are paid gross into the plan, then the income is instead taxed on the way out, at the normal rates. The Italian PC has a preferential rate of taxation starting at 15% and reducing to 9% depending on how many years you have been contributing to the fund, because it is taxed during the accumulation phase. In short there are some distinct differences which lead me to believe that declaring a pension fund / retirement fund (which is a trust) as a ‘previdenza complementare’ in Italy, is incorrect. If you are in doubt then speak with your commercialista.
In a lot of cases I was informed that the commercialista had contacted the local Agenzia delle Entrate and they had confirmed that this is correct. So, who was I to challenge it? However, I still believed that it was incorrect. Of course, no-one challenged it because it also meant the difference between being paying a 15% flat tax rate on that income or progressive income tax rates starting from 23%.
However, during the summer the client I referred to above contacted her commercialista, who did not accept this definition, but in fact presented an ‘interpello’ issued by the Agenzia delle Entrate (an interpello is basically an ‘opinion’ from the Agenzia delle Entrate on a specific case that is presented to them) from May 2020 regarding a UK personal pension holder.
In the interpello (which you can find HERE – the interesting part starts on page 7) it indicates that a UK personal pension should not be considered a ‘previdenza complementare’, but should actually be subject to progressive tax rates in Italy. This is quite an eye-opener because if this is the case, then it flies against the information gained from various commercialisti.
I should add here that the interpello is merely an indicative judgment in this particular case and is by no means a definitive decision for everyone holding a UK personal pension and resident in Italy. However, the fact that the AdE has gone to the trouble to write this gives us a pretty good idea into their thinking, should they choose to follow it up.
What to do?
So what should you do if your commercialista has advised you to declare your UK personal pension as a ‘previdenza complementare’ and you are now benefitting from the 15% flat tax rate? I would take the interpello to them and ask their opinion based on the new evidence. Or you may choose to do nothing. Whatever your choice or the advice from the commercialista, we are now a little more enlightened into the thoughts of the Agenzia delle Entrate on this topic.
It is worth noting here that Brexit is almost upon us and whatever your opinion as to how the UK will exit, a messy unfriendly exit may bring a few matters to light. In particular, the interpello also states that pension funds which ‘could’ be deemed to qualify are those which conduct business cross border and meet the pension rules of both EU states in which they are operating. I don’t know of a UK personal pension provider that does this anyway, but the mere fact that the UK is in the EU may gloss over some of these finer points. But then, what will happen once the UK leaves the EU?
Which leads nicely on to the next problem that Brits are now facing in Italy.
By now, I am sure you have read the headlines saying that a number of UK banks are contacting or have contacted their customers living in the EU to close down their UK banks accounts, potentially leaving them without a UK account. To date the main culprits are the Lloyds banking group, which includes Halifax and the Royal Bank of Scotland, Coutts and Barclays.
I am afraid to say that the rumours are true and I know of a number of people who have been contacted already.
The culprit, of course, is Brexit…
These banks have now had to weigh up the benefits of retaining bank account holders in the EU post Brexit, because once they out of the EU market place they will be forced to adhere to individual EU jurisdictional regulations, as well as UK regulations, if they want to continue to service clients in any EU state. Clearly, for a bank which has no intention of developing business in Italy (in our case), nor does it have a sufficiently large client base in Italy already, then they are going to need to look to close down activities in those jurisdictions to ensure they do not fall foul of the regulators.
It is interesting that, in contrast, HSBC Bank has not decided to pull from its EU markets because it has sufficient activities which take place throughout the EU. I have also heard that Nationwide is also not pulling any activities just yet.
For many clients this is going to be a very tough time, as you could lose a bank account in the UK when you may still have bills being paid, or you simply use it when you are in the UK. To make matters worse, because you are no longer a resident in the UK, you can no longer request an account from another UK banking group.
Many of the groups will also offer their international bank account services, of which the majority are based in the Isle of Man. This is not a good idea because the Isle of Man is not in the UK, but is a UK dependant territory and is deemed a fiscal paradise. It is currently on the grey list of ‘could do better’ in global fiscal transparency with the EU. It is anyone’s guess what will happen after the UK leaves the EU, but it is certainly not beyond imagination that the EU will look to impose punitive tax measures for anyone holding accounts in UK offshore jurisdictions. Let’s not forget that it only came off the black list in 2015!
So, without any other options perhaps one of the better solutions is to look at an Italian bank which can provide a GBP account. I have used Fineco for years, and recommend it to many clients. They offer a EUR current account linked to a GBP and USD account and transfers of cash between accounts are made at spot rate, with no fee. It might be a solution, but will be no consolation for losing your UK bank account. Once again, another downside of Brexit for those of us that have chosen to live in the EU.
Still on the subject of banking, does the sound of a bad bank sound appealing to you? A bank that is so bad that it can take all the bad from all the other banks and just keep it there and away from us all. It sounds like a great idea in theory.
On the 25th September the EU had a consultation round table event with a number of European bank leaders, asset management groups and government officials to discuss the possibility of creating a European-wide ‘bad bank’ which would take all that bad debt (debt which cannot be paid back for one reason or another) and which is currently sat on the balance sheets of a lot of European banks, particularly Italian ones and other Southern European states. The idea being that this bad debt could be whisked away from the banks, freeing them up from the worry of having to manage this debt and giving them the liberty to start lending once again, supposedly to individuals and businesses which pose a better credit risk and would be more reliable at paying the debt back.
So far so good. I would not argue at this point. It seems like a good idea to help stimulate economies especially after the COVID-19 crisis.
But morally, should we accept this?
This is the argument put forward by a number of EU functionaries who argue that the banks are, once again, getting another bail out at the cost of the taxpayer. You and I.
To remedy this, the ‘Bank recovery and resolution directive’ (BRRD) has proposed that certain parties should also have to meet some of that cost as well as the EU/taxpayer. Those parties have been identified as the shareholders of the bank, holders of the banks bonds and lastly, the one that should interest us all: deposit holders with more than €100,000 or currency equivalent held in any banking group. Does this mean that the EU, to fund the COVID-19 crisis, could make a cash grab on deposit holders with more than €100,000 or currency equivalent in their accounts? At this point it is only a proposal, but I shall be watching this space carefully.
Based on this news, there is probably no better time to look at your financial plans closely, especially if you are holding high levels of cash in any banks around Europe.
You might be someone who has been investing in NS&I products in the UK as a diversifier to your other holdings, or maybe just someone who likes to ‘play it safe’ with your money.
National Savings and Investments, NS&I, are backed by the UK government and due to the COVID-19 crisis, the government has now moved to slash rates on all national savings products to the point where you have to ask yourself, ‘are they worth it?’
The rate on the Direct Saver account has been slashed from 1% interest per annum to just 0.15%. Income Bonds, which have for a long time been considered a best buy, have been slashed from 1% interest rate to just 0.01% pa.
Not only that, but the average interest rate on Premium Bonds (with the chance to win the big prize) will fall from 1.4% to just 1% and the amount of prizes issued will be reduced significantly.
If that is not enough, the Bank of England is also toying with the idea of introducing a negative base interest rate. If they apply that to the NS&I products, then you will be effectively paying the government to hold them.
Time to consider alternatives to protect your capital?
Italy has been desperately trying to find ways for the people to start using digital forms of payment instead of cash so that the economy can become more fiscally transparent and they can raise more tax revenue.
By the end of November we will have confirmation on the new push to drive people towards using digital methods of payments in Italy, even for small transactions, such a buying coffee at the bar. The Italian government has come up with an idea to incentivise the drive to digital forms of payment.
Firstly, from next year the maximum spend on contactless forms of payment will rise from €30 to €50.
In addition, they have dreamt up another seemingly difficult to navigate proposal for a refund of expenses paid by card payments. I will have a go at deciphering it here:
1. You will get a 10% reimbursement on expenses paid up to a maximum spend of €3000 per annum (hence a tax refund of max €300 pa).
2. But, to achieve this you must make a minimum of 50 transactions every 6 months (100 every year) and the €3000 is in fact split into a spend of a maximum of €1500 every 6 months. The idea being that you can’t just go and spend on something costing €1500 every 6 months or a series of high value items to reach the limit.
To receive the refund you will need to register on the app and enter your codice fiscale, and your debit/credit card details.
3. Not only are they offering cash back on transactions but they are discussing a ‘super cashback’ prize of €3000 for the first 100,000 people who reach the maximum number of digital transactions in a year, within the limits provided above.
Certainly food for thought. Watch out for confirmation of these offers sometime before the end of November and then start registering to get your cashback. In theory it should be easy, but based on previous experience of Italian government initiatives I fear it may turn out to be more complicated than first glance.
I hoped you have enjoyed this ‘return to normality’ article. I will be sending out more information in the coming weeks and months to keep you up to speed with the goings on in the financial world and how that might impact our lives in Italy.
If any information from this article has interested you and you would like to get in contact, you can reach me on email@example.com or on cell phone 333 649 2356 by call, sms or whatsapp.
– 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
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
or call/whatsapp on +39 333 649 2356
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***
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.
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.
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.
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.
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!
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!
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.
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.
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.
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.
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.
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’.
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.
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.
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?
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.
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 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?
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?
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.
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.
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.
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.
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:
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.
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:
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%.
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%.
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.
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.