You are on page 1of 43

Italy: Problems, Consequences and Recommendations

Davide Serra

Algebris Investments (UK) LLP is Authorised and Regulated by the Financial Services Authority
2014 Private & Confidential. Algebris Investments, 7 Clifford Street, London, W1S 2FT, United Kingdom.

www.algebris.com

Agenda

A. Problems
B. Future consequences
C. Recommendations

Algebris Investments (UK) LLP is Authorised and Regulated by the Financial Conduct Authority
2014 Private & Confidential. Algebris Investments, 7 Clifford Street, London, W1S 2FT, United Kingdom.

A. The problem: High debt, low growth


GDP Growth % - 5 years rolling average vs. Debt / GDP %

5%

Debt/GDP

Italy avg. Growth

OECD avg. growth

4%

680%
640%

600%
560%

3%

520%
480%

2%

440%

400%

1%

360%
320%

0%

280%

First Republic

Second Republic

200%

-2%

160%
120%

-3%
-4%

Debt/GDP now
at 130%+

240%

Debt/GDP

-1%

Third
Republic

80%
40%
0%

Source: OECD, ISTAT


Algebris Investments (UK) LLP is Authorised and Regulated by the Financial Conduct Authority
2014 Private & Confidential. Algebris Investments, 7 Clifford Street, London, W1S 2FT, United Kingdom.

Why does debt increase and growth decrease?


1. Chronic tax evasion

1.

Low business competitiveness

2. The tax evasion party

2.

Low market share in key sectors

3. Overly complex tax system

3.

High tax rates

4. High public expenditure vs. poor public services

4.

Corruption

5. High cost for public employees

5.

Low labour productivity

6. High pension costs

6.

Low labour participation

7.

High energy costs

8.

Inefficient legal system

9.

Low R&D investments

Debt / GDP

Algebris Investments (UK) LLP is Authorised and Regulated by the Financial Conduct Authority
2014 Private & Confidential. Algebris Investments, 7 Clifford Street, London, W1S 2FT, United Kingdom.

Growth

Why debt increases: 1. Tax evasion...


The shadow economy [% of GDP]

Italy (2012)

17.4

Mexico (2003)

12.1

Spain (2000)

11.2

United Kingdom (2009)

7.9

Austria (2004)

6.5

United States (2005)

6.2

Sweden (2005)

4.5

Ireland (1998)

France (2008)

3.9

Belgium (2002)

3.5

Denmark (2003)

2.4

Canada (2008)

2.2

Australia (2001)

1.3

Netherlands (1995)
Norway (2005)

Mario Monti, Aug 2012: Tax evasion produces a


huge damage in the perception of our country
abroad. I believe that Italy is in this difficult position
especially because of this..

Shadow economy determinants:


Public expenditures efficiency perception
Ease of paying taxes
Efficacy and efficiency of the legal system
Average tax rate

1
0.4

Little tangible improvement has been made!

Source: Una nota sulle determinanti dell'economia sommersa, Confcommercio, May 2011
Algebris Investments (UK) LLP is Authorised and Regulated by the Financial Conduct Authority
2014 Private & Confidential. Algebris Investments, 7 Clifford Street, London, W1S 2FT, United Kingdom.

...never challenged
The shadow economy [% of GDP]

21%
20.0%

20%

19.7%

20%

19.3%

19.2%

19.0%
19%

19.2%

19.1%
19.0%

19%

Small improvements in 20
years

18.5%
18.6%

18.6%

18%

17.8%

18.1%
17.9%

17.5%

18%

17.5%

17.5%

17%
1992

17.4%

17.8%
17.3%

17.2%
1995

1998

2001

2004

2007

2010

17.4%
2013

Source: Fiscalita ed economia sommersa, Confcommercio, Luglio 2013


Algebris Investments (UK) LLP is Authorised and Regulated by the Financial Conduct Authority
2014 Private & Confidential. Algebris Investments, 7 Clifford Street, London, W1S 2FT, United Kingdom.

2. The Tax Evasion Party


Total Tax Income
Indirect Taxes

Total:
450

423

Self-employed [% of total]
Corporates&Other

409

407

Self-employed

412

Tax Income (bn)

412
195

400
350

Employees

191

193

185
189

300
250
200

102

94

150
13

13

79

55

62

14

13

149

152

2011

2012

14

100
117

117

126

2008

2009

2010

50
0

Source: MEF
Algebris Investments (UK) LLP is Authorised and Regulated by the Financial Conduct Authority
2014 Private & Confidential. Algebris Investments, 7 Clifford Street, London, W1S 2FT, United Kingdom.

Grecia
Italia
Spagna
Polonia
Repubblica Ceca
Belgio
Svezia
Ungheria
Paesi Bassi
Slovenia
Austria
Bulgaria
Irlanda
Danimarca
Cipro
Finlandia
Regno Unito
Lituania
Germania
Portogallo
Estonia
Lettonia
Lussemburgo
Romania

36%
32%
22%
20%
19%
18%
15%
14%
12%
11%
10%
10%
10%
9%
8%
7%
7%
6%
5%
5%
4%
3%
3%
2%
0%

5%

10%

15%

20%

Self-employed 32%
Employees 68%
Self-employed should
pay at least 45b more,
3% of GDP

In 20 years this caused


60% of Debt / GDP

25%

30%

35%

40%

Source: ISTAT 2010


7

3. Overly complex tax system


Ease of paying taxes (higher is worse)

Italy

131

Belgium

75

Germany

72

15 Payments
269 hours per year

US

69

Average OECD

720 potential tax reliefs to be checked

56

Spain

34

8 Payments
Switzerland

UK

18

16

110 hours per year


few tax reliefs

Source: The World Bank, IFC Doing Business 2013


Algebris Investments (UK) LLP is Authorised and Regulated by the Financial Conduct Authority
2014 Private & Confidential. Algebris Investments, 7 Clifford Street, London, W1S 2FT, United Kingdom.

4. High public expenditure vs. low public services


Public expenditure [% of GDP] Italy

Public expenditure [% of GDP] Average DE, FR, ES, UK

Italy

8.3%

7.5%

Average DE, FR, ES,UK

7.6%
5.9%

5.6%
4.1%

4.5%
3.8%

2.0%

1.9%

1.8%

1.4%

Health

General
public
services

Education Economic
Public
affairs
order and
safety

Defence

Health

General
public
services

Education Economic
Public
affairs
order and
safety

Defence

Source: Eurostat 2011


Algebris Investments (UK) LLP is Authorised and Regulated by the Financial Conduct Authority
2014 Private & Confidential. Algebris Investments, 7 Clifford Street, London, W1S 2FT, United Kingdom.

5. High cost for public employees...

Population

Public
employees

Public
employees vs.
Labour force

Expenditure
per employee
000

Expenditure
for public
wages/GDP

65.3 millions

5,493,200

20.9%1

47.8

13.2%

81.8millions

4,434,000

10.5%

45.0

7.7%

63.3 millions

5,719,000

17.9%

33.8

10.8%

60.8 millions

3,417,000

13.3%

49.5

10.6%

46.2 millions

3,136,100

12.9%

39.4

11.1%

In 2012 public
expenses on
employees declined
1.2% for the first
time in 12 years
Still FR/DE/ES on
average spend
11% less than Italy
for every employee,
while UK 26%

Official data updated as of 2011


Source: Relazione 2012 sul costo del lavoro pubblico, Corte dei Conti, Eurostat
Algebris Investments (UK) LLP is Authorised and Regulated by the Financial Conduct Authority
2014 Private & Confidential. Algebris Investments, 7 Clifford Street, London, W1S 2FT, United Kingdom.

10

..and poor public services..


Perception of public services (higher is better)

Finland

Institutions

Germany
Denmark

Healthcare

Sweden
Japan

Education

Holland

Infrastructures

Belgium
Canada
Norway
Estonia
UK
Ireland
Portugal
Cyprus
Spain
Slovenia
Greece

From 2000 to

Slovakia

2010 little

Italy

Mexico
0

3
End 2000

improvement

End 2010

Source: Confcommercio
Algebris Investments (UK) LLP is Authorised and Regulated by the Financial Conduct Authority
2014 Private & Confidential. Algebris Investments, 7 Clifford Street, London, W1S 2FT, United Kingdom.

11

...waste 1.6% GDP each year

Average expenditure per public


employee in
UK, ES, DE, FR

Average expenditure per public


employee in ITA 48,400

41,200

If Italy lowered expenditure and


spent the same amount as the
average:
~25b savings,
~1.6% of GDP

Province of Milan:

Lombardia Region:

13 executive councillors: average compensation


71,794/year
45 province councillors: average compensation
27,770/year
38 executives: average compensation
110,841/year

81 regional councillors: average compensation


124,621/year
163 executives: average compensation
91,149/year
50 directors: average compensation
160k/year

Source: Relazione 2012 sul costo del lavoro pubblico, Corte dei Conti, Regione Lombardia, Provincia di Milano
Algebris Investments (UK) LLP is Authorised and Regulated by the Financial Conduct Authority
2014 Private & Confidential. Algebris Investments, 7 Clifford Street, London, W1S 2FT, United Kingdom.

12

6. High pension cost


Pensions expenditure [% of GDP]

2050

2010
Italy

15.3%

France

14.6%

Germany

10.8%

Spain
United
Kingdom
United States

10.1%
7.7%
4.6%

Italy

15.7%

France

15.1%

Germany

13.0%

Spain
United
Kingdom
United States

14.0%
8.2%
4.8%

Average UK, ES, DE, FR: 10.8% of GDP


Italy's costs would be 70bn (4.5% of GDP) lower if it spent like its neighbours!
Source: OECD Pensions Outlook 2012
Algebris Investments (UK) LLP is Authorised and Regulated by the Financial Conduct Authority
2014 Private & Confidential. Algebris Investments, 7 Clifford Street, London, W1S 2FT, United Kingdom.

13

Recap: Why does debt increase?

Tax evasion = 3-4% GDP


Public expenditure and
wages = 1.6% GDP

~10% of GDP wasted


annually

Pensions = 4.5% GDP

Algebris Investments (UK) LLP is Authorised and Regulated by the Financial Conduct Authority
2014 Private & Confidential. Algebris Investments, 7 Clifford Street, London, W1S 2FT, United Kingdom.

14

Second problem: Growth


1. Italy is not competitive...
GCI 2012-2013
Country/Economy

Rank

Score

Switzerland

5.7

Singapore

5.6

Finland

5.5

Germany

5.5

United

5.5

Sweden

5.5

Hong

5.5

Netherlands

5.4

Japan

5.4

United

10

5.4

Norway

11

5.3

Taiwan

12

5.3

Qatar

13

5.2

Canada

14

5.2

Denmark

15

5.2

Italy

49

4.4

Italy ranks 49th in the WEF


2013 Global Competitiveness
Index

#49 Competitiveness
#9 GDP
#5 Debt

Source: 2012 World Economic Forum


Algebris Investments (UK) LLP is Authorised and Regulated by the Financial Conduct Authority
2014 Private & Confidential. Algebris Investments, 7 Clifford Street, London, W1S 2FT, United Kingdom.

15

2. Low market share in key sectors: High Tech, Cheap


Manufacturing, Commodities
Most important manufacturing countries [$ bn , current prices]
1,923

1,856
1,084
614

China

US

Japan

Germany

308

282

268

Italy

Brazil

France

UK

15.0%

13.8%
7.4%

6.4%

Italy

Spain

231

Source: The Manufacturers Organization, 2012

% High Tech exports in manufacturing sector 2011


25.8%

23.7%

21.3%
18.1%

China

France

United Kingdom United States

Germany

Euro Area

Note: Products with high R&D; aerospace sector, computer, pharmaceuticals, scientific and electronic equipment
Source: The World Bank 2012
Algebris Investments (UK) LLP is Authorised and Regulated by the Financial Conduct Authority
2014 Private & Confidential. Algebris Investments, 7 Clifford Street, London, W1S 2FT, United Kingdom.

16

..in early 2000s everybody studied law!

Law

Engineering and Science

1998
28%

2010
29%

28%

27%

31%
26%

26%
23%

22%

17%
11%
5%
4%

Spain

Italy

United
Kingdom

8%

6%
3%

Germany

France

Spain

Italy

4%

4%

United
Kingdom

Germany

France

Until 2005 few students graduated in Science and Engineering vs. Law
Source: Eurostat
Algebris Investments (UK) LLP is Authorised and Regulated by the Financial Conduct Authority
2014 Private & Confidential. Algebris Investments, 7 Clifford Street, London, W1S 2FT, United Kingdom.

17

3. Too high tax rates

Tax pressure % of GDP


Italy
France
Estonia
Belgium
Austria
Sweden
Hungary
Czech Republic
Slovak Republic
Germany
Greece
Romania
Lithuania
Poland
Portugal
Netherlands
Finland
Spain
Latvia
United Kingdom
Slovenia
Bulgaria
Denmark
Ireland
Cyprus
Luxembourg

68.5
65.7
58.6
57.3
53.1
52.8
52.4
49.1
48.8
46.7
46.4
44.4
43.9
43.6
Profits taxes
43.3
Labour taxes
40.5
39.0
Other taxes
38.7
37.9
37.3
34.7
28.1
27.5
26.3
23.1
20.8

Profit taxes and social contributions


rates among the highest in the world

Italy allowed tax evasion to small


corporations and squeezed the big
ones

Corporations dont grow and move


elsewhere!

Source: The World Bank, IFC Doing Business 2012

Algebris Investments (UK) LLP is Authorised and Regulated by the Financial Conduct Authority
2014 Private & Confidential. Algebris Investments, 7 Clifford Street, London, W1S 2FT, United Kingdom.

18

4. Corruption
Irregular payments and bribes index [1 = worst , 7 = best]
Svezia

5.7

Norvegia

5.6

Regno Unito

5.4

Danimarca

5.1

Germania

4.9

Stati Uniti

4.5

Giappone

4.5

Francia

4.4

Belgio

4.2

Spagna

3.7

Portogallo

2.9

Italia

2.5

Grecia

2.5

Slovak Republic

Only Greece and


Slovak Republic
worse
Deep dive from
2000s score of 4.4
Only recently
Montis government
introduced measures
to prevent and stop
corruption in the
public administration

2.4

Source: World Economic Forum, Confcommercio 2013


Algebris Investments (UK) LLP is Authorised and Regulated by the Financial Conduct Authority
2014 Private & Confidential. Algebris Investments, 7 Clifford Street, London, W1S 2FT, United Kingdom.

19

5. Low labour productivity...


Euro produced per hour in each countrys economy

69.7

Distance from main EU countries


widened in the last year (+3%)

Average FR, DE, UK, ES = 39.6


Italy = 32.2 (-23% per hour)

52.7
45.4

45

42.4

39.5

39.3
32.2

32.1

Northern Core countries way


more productive

31.3
20.3
16.9

Only Portugal, Spain and Greece


worse than Italy

Source: Eurostat 2013


Algebris Investments (UK) LLP is Authorised and Regulated by the Financial Conduct Authority
2014 Private & Confidential. Algebris Investments, 7 Clifford Street, London, W1S 2FT, United Kingdom.

20

...which doesnt legitimize recent wage increases


Cumulated % change 2000-2011 in manufacturing

Germany

France

Market Share 2007-2011 in manufacturing sector

Italy

China

8%

Brazil

Productivity

+23%

+23%

+12%

Wages

+22%

+30%

+38%

+1%

-7%

-26%

India

1%
0%

Russia

0%

South Korea

0%

Italy is losing competitiveness and market

Japan

0%

share in manufacturing sector

France

-1%

Germany

-1%

Italy

-1%

unit labour cost

Last 10 years:
Wages +38%

United States

Productivity +12%

-4%

Source: IMF, CSC, Global Insight


Algebris Investments (UK) LLP is Authorised and Regulated by the Financial Conduct Authority
2014 Private & Confidential. Algebris Investments, 7 Clifford Street, London, W1S 2FT, United Kingdom.

21

6. Low labour participation

% labour participation between 15 and 64

% woman labour participation between 15 and 64

Germany

77.1%

Germany

United
Kingdom

76.3%

United
Kingdom

Spain

74.1%

71.7%

70.3%

Spain

EU 27

71.8%

France

France

71.0%

EU 27

67.9%

66.7%

65.6%

=
Italy

63.7%

Italy

53.5%

Source: Eurostat 2012


Algebris Investments (UK) LLP is Authorised and Regulated by the Financial Conduct Authority
2014 Private & Confidential. Algebris Investments, 7 Clifford Street, London, W1S 2FT, United Kingdom.

22

7. High energy costs...


Deficit production-consumption (TWh)

Electricity prices for the Industry (/kWh)


0.13

France

44

Germany

0.11
0.09

20

0.10

0.11

0.10

0.07

Spain

11

Belgium

-10

United Kingdom

-12

EU 27

-14

Italy

-43

Source: Enerdata 2012


Algebris Investments (UK) LLP is Authorised and Regulated by the Financial Conduct Authority
2014 Private & Confidential. Algebris Investments, 7 Clifford Street, London, W1S 2FT, United Kingdom.

+37% price Vs EU 27 average


Sticky prices, highly dependent from long term agreement
with foreign suppliers more than from demand/supply
Source: Eurostat 2012
23

...due to less efficent production


Nuclear power production [% on the gross production]

Renewable energy production [% on the gross production]


32.8%

74.9%

31.4%

49.7%
17.1%
27.5%

13.7%
22.8%

20.4%

12.4%

16.3%
4.5%
3.5%

In 2011 a second referendum abolished any


attempt to build nuclear power plants
From 2007 production from renewable sources
has almost doubled under poorly designed
public subsidies

3.9%

3.6%

0.0%

Cost of electricity up ~11% in two years


Firms spend ~10-15% more on electricity than in
the other EU countries; in a cost cutting economy
many decides to move abroad (ie. Alcoa)

Source: Enerdata 2012, Terna 2010


Algebris Investments (UK) LLP is Authorised and Regulated by the Financial Conduct Authority
2014 Private & Confidential. Algebris Investments, 7 Clifford Street, London, W1S 2FT, United Kingdom.

24

8. Ineffective legal system


Legal System Efficiency Index
Australia
UK
Germany
Norway
Japan
US
France
Canada
Sweden
Spain
Denmark
Portugal
Mexico
Greece
Slovenia
Italy
Slovakia

Average number of days before sentence is pronounced


6.1
6
5.9
5.8
5.8
5.7
5.6
5.6
5.5

4.9
4.8
4.8
4.3
4.1
4

3.6
3.5

Will the legislative decree on liberalization (January 2012)


enhance the situation with the introduction of companies
courthouses?

ITALY

vs.

DE, UK, ES, FR

1210 Days

530 Days

Number of court iterations needed to observe a contract


Cyprus
Italy
Spain
Greece
Mexico
Canada
Denmark
Norway
United States
Portugal
Sweden
Germany
France
UK
Australia
Belgium

43
41
40
39
38
36
35
34
32
32
30
30
29
28
28
26

Source: Fiscalita ed economia sommersa, Confcommercio, Luglio 2013


Algebris Investments (UK) LLP is Authorised and Regulated by the Financial Conduct Authority
2014 Private & Confidential. Algebris Investments, 7 Clifford Street, London, W1S 2FT, United Kingdom.

25

...also bankruptcy procedures take years


Duration of a bankruptcy process [years]
Ireland
Japan
Canada

~2 years to go bankrupt

0.4
0.6

Belgium

0.9

Finland

0.9

Norway

0.9

Denmark

UK

Germany

Montis executive modified the


bankruptcy law in the effort to
reveal a potential insolvency in
advance and ease a creditor
debtor agreement:

0.8

Introduction of the
Concordato preventivo

1.2

Spain

1.5

US

1.5

Italy

1.8

Mexico

1.8

Higher protection to the


economic activity

France

1.9

Greece

Portogallo

Slovacchia

Intervention to ease banks


financing in a debt
restructuring process
4

Source: Fiscalita ed economia sommersa, Confcommercio, Luglio 2013


Algebris Investments (UK) LLP is Authorised and Regulated by the Financial Conduct Authority
2014 Private & Confidential. Algebris Investments, 7 Clifford Street, London, W1S 2FT, United Kingdom.

26

9. Little R&D investments


R&D expenditure % GDP

Italy

Spain

UK

France

Germany

1.25%

1.33%

1.77%

2.24%

2.88%

Source: Eurostat 2012


Algebris Investments (UK) LLP is Authorised and Regulated by the Financial Conduct Authority
2014 Private & Confidential. Algebris Investments, 7 Clifford Street, London, W1S 2FT, United Kingdom.

% Enterprises

% Government

45%

42%

45%

49%

45%

32%

54%

37%

64%

30%

Source: OECD 2010/2011


27

B. Future consequences:
High debt + low growth = no new births
Natural growth rate [rates per 1000pp]

Historical data: Natural growth rate (per 1000pp)


12
3.87

6,000
Debt (bn)

10

Natural Growth Rate


5,000

2.94

8
6

4,000

1.52
4
3,000
2
Germany

Italy

France

United
Kingdom

Spain

-0.87

2,000

-2
1,000
-4

-2.71

-6
1960

1970

1980

1990

2000

0
2010

Source: CIA World Factbook 2012 Est., ISTAT 2011


Algebris Investments (UK) LLP is Authorised and Regulated by the Financial Conduct Authority
2014 Private & Confidential. Algebris Investments, 7 Clifford Street, London, W1S 2FT, United Kingdom.

28

No jobs for young people Youth Unemployment Sky-rocketing


Youth unemployment % (19-25 years old)

2007

2012

In 5 years almost
doubled
2013 Estimate: 41.6%
55%

53%

35%
30%
23%

21%
16%
12%
8%

Germany

8% 8%

Japan

14%

25%

16%

11%

US

20%

20%

23%
18%

9%

UK

EU 27

France

Ireland

Italy

Spain

Greece

Source: Eurostat 2012


Algebris Investments (UK) LLP is Authorised and Regulated by the Financial Conduct Authority
2014 Private & Confidential. Algebris Investments, 7 Clifford Street, London, W1S 2FT, United Kingdom.

29

Unfair system for present and future generations


Pensionable age progression (men)
80

First Republic

Second Republic

70
60
50
40
30
20
10
0
1949

1958

1971

1983

1989

1993

1999

2002

2010

2020

2030

2040

2050

1983: Retirement at 55

2050: Retirement at 70

Source: OECD Pensions Outlook 2012


Algebris Investments (UK) LLP is Authorised and Regulated by the Financial Conduct Authority
2014 Private & Confidential. Algebris Investments, 7 Clifford Street, London, W1S 2FT, United Kingdom.

30

...firms will leave the country...

High spreads on funding affect directly firms competitiveness

bn
Net Revenues
Gross profit
EBITDA
EBIT
Interest expenditures
Interest proceeds
Earnings before taxes
Net income

2012
646
125
58
30
(20)
24
34
15

Debt / EBITDA

5.5x

Interest expense/ Financial Debt


Additional Spread

6.0%

2012
100.0%
19.4%
9.0%
4.6%
(3.1%)
3.8%
5.3%
2.2%

Interest expense/ Financial Debt

Scenario
+250
100.0%
19.4%
9.0%
4.6%
(4.4%)
3.8%
4.0%
1.5%

Scenario 1: Increase in cost of funding


for 3 years
+250bps
42% interest expense increase
33% less profit
Net income margin drops from 2.2% to
1.5%

2.5%

8.5%

Source: Mediobanca Research (MBRES), Algebris Investments (UK) LLP

Algebris Investments (UK) LLP is Authorised and Regulated by the Financial Conduct Authority
2014 Private & Confidential. Algebris Investments, 7 Clifford Street, London, W1S 2FT, United Kingdom.

Delta %
0%
0%
0%
0%
42%
0%
(25%)
(33%)

Deindustrialization of Italian
firms
31

...Italian families will lose wealth...

Scenario 1
+100 bps
spread

2010A

mm
Cash and marketable
securities

Debt

2010A Scenario 1 Scenario 2


3,600

-887

3,600

-887

3,600

8,639

Scenario 2
200 bps
spread

7,581

6,843

-12%

-21%

-887
5,926
4,868

+ Real Estate

5,926

%Growth
Net Wealth
%Growth

8,639

4,868

4,130

-17.9%

-30.3%

7,581

6,843

-12.2%

-20.8%

Source: Equita Sim, Algebris Investments (UK) LLP

Algebris Investments (UK) LLP is Authorised and Regulated by the Financial Conduct Authority
2014 Private & Confidential. Algebris Investments, 7 Clifford Street, London, W1S 2FT, United Kingdom.

4,130

2,713

2,713

2,713

2010A

Scenario 1

Scenario 2

Real Estate

Net cash

32

New Government, New Era?

...Prime Minister Renzi has committed to 1 key reform per month..


Target: 15th place in the Doing Business index by 2018

Is this a precondition for a Third Republic?

Algebris Investments (UK) LLP is Authorised and Regulated by the Financial Conduct Authority
2014 Private & Confidential. Algebris Investments, 7 Clifford Street, London, W1S 2FT, United Kingdom.

33

C. Recommendations

1.

Reform fiscal system

Simple and digital tax system

Remove cash

Incentivise corporations

2.

Reduce public expenditure

3.

Invest only where there is a real prospect of success

4.

Reform legal system

Algebris Investments (UK) LLP is Authorised and Regulated by the Financial Conduct Authority
2014 Private & Confidential. Algebris Investments, 7 Clifford Street, London, W1S 2FT, United Kingdom.

34

1. Simple and digital tax system


A radical reform is needed...

...to enhance the actual highly fragmented system


Three different VAT rates (21%, 10% and 4%) applied upon the type of

Simple tax regulations

good/service

Unification of minor taxes and referral to a single Tax Authority

The housing tax IMU, introduced in 2013 and already subject to strong

Efficient online systems

opposition from the centre-right party

Optimization of tax reliefs

IRPEF, IRAP, INPS among the most important taxes

Payments (number per year)


Time (hours per year)
Profit tax (%)
Labor tax and contributions (%)
Other taxes (%)
Total tax rate (% profit)

Switzerland

UK

Spain

19
63
8.9
17.7
3.6
30.2

8
110
22.2
10.2
3.1
35.5

8
167
1.2
36.8
0.7
38.7

OECD High
Income
12
176
15.5
22.8
1.7
40.0

US

Germany

Belgium

Italy

8
175
27.6
10
9.1
46.7

9
207
18.9
21.9
5.9
46.8

11
156
5.4
50.8
1.5
57.7

15
269
22.9
43.4
2.0
68.3

Source: World Bank 2012


Algebris Investments (UK) LLP is Authorised and Regulated by the Financial Conduct Authority
2014 Private & Confidential. Algebris Investments, 7 Clifford Street, London, W1S 2FT, United Kingdom.

35

1. Cash removal = an efficient way to fight tax evasion

Source: Visa, A.T. Kearney 2013


Algebris Investments (UK) LLP is Authorised and Regulated by the Financial Conduct Authority
2014 Private & Confidential. Algebris Investments, 7 Clifford Street, London, W1S 2FT, United Kingdom.

36

1. The case of South Korea


Korea: The Shadow Economy % of GDP

Tax system reform 98-99


Deduction of credit card
expenditures from tax bill

22
20
18

Credit card receipts participate


to a national lottery game

16
14
12
10
8
1990

1993

1996

1999

2002

2005

Credit card payments in South Korea (tr KRW)

In 4 years Shadow Economy


vs. GDP improved 5%
493.8

63.6
1998

2008

57% of total
consumption

For Italy a similar outcome


could add 20b tax income,
1.5% of GDP
Debit cards may be used
instead of credit cards

2010

Source: Myongji University, Algebris Investments (UK) LLP


Algebris Investments (UK) LLP is Authorised and Regulated by the Financial Conduct Authority
2014 Private & Confidential. Algebris Investments, 7 Clifford Street, London, W1S 2FT, United Kingdom.

37

1. Stimulate investments in corporations: reduce


the tax pressure...
Lower taxation on corporations and employees (2% of GDP) and raise taxation on financial income
Tax Rate

Optimal

Corporations

50-60%

40-50%

Employees

50%

40%

Financial assets

20%

30%

Government
securities

12.5%

Recommendation
-1% GDP 16bn

-1% GDP 16bn

~+1% GDP 10bn

The missing 10-15bn will be retrieved from the reduction of both tax evasion and public expenditure

Source: Algebris Investments (UK) LLP


Algebris Investments (UK) LLP is Authorised and Regulated by the Financial Conduct Authority
2014 Private & Confidential. Algebris Investments, 7 Clifford Street, London, W1S 2FT, United Kingdom.

38

2. Reduce public expenditure

Widespread Spending Review

Disposal of government assets

70-80bn

Radical rationalization of public expenditure

Real Estate

Reduction of managers and executives in public companies

Holdings in listed companies

40bn

Increase of public employees productivity

Capitalization of concessions

30bn

Waste

Debt

Services

Interest expenditure
Growth

Source: Algebris Investments (UK) LLP , Cassa Depositi e Prestiti


Algebris Investments (UK) LLP is Authorised and Regulated by the Financial Conduct Authority
2014 Private & Confidential. Algebris Investments, 7 Clifford Street, London, W1S 2FT, United Kingdom.

39

2. A concrete example..

Province of Milan
President and
councillors

13 people
70k each

Board of the
province
47 people
22k each

Executives
48 people
110k each

..6.7 millions only for their


wages..
..And 108 politicians and
executives..

Real estate here is valued


20k/m

Headquartered in San Babila


Centre of Milan

..and there is a huge waste of


resources due to poor
energy efficiency of old
buildings..

Source: Regione Lombardia, Algebris Investments (UK) LLP


Algebris Investments (UK) LLP is Authorised and Regulated by the Financial Conduct Authority
2014 Private & Confidential. Algebris Investments, 7 Clifford Street, London, W1S 2FT, United Kingdom.

40

3. Invest only where there is a real prospect of success


1.

Focus on Education and Research to revive


manufacturing sector and retrieve
competitiveness

2.

Focus on exports

Telecommunications

Machinery and equipment


Metallurgy
Automotive
Chemicals
Electronic devices
Pharmaceuticals
Made in Italy

No lawyers and politicians

Scientists and Engineers

Energy
Transportation
Defence
Agro industrial

Algebris Investments (UK) LLP is Authorised and Regulated by the Financial Conduct Authority
2014 Private & Confidential. Algebris Investments, 7 Clifford Street, London, W1S 2FT, United Kingdom.

Source: EUROSTAT, IMF, Confindustria, Algebris Investments (UK) LLP

41

4. Reform legal system

Organizational restructuring

Improve business competitiveness

Reorganisation of law offices following best

preserve companies rights

European and national practices (i.e. Torino)

Digitalisation of the whole law system

Geographical redistribution of law offices

Focus on post-sentence execution to

Strengthen credit recovery mechanism


making it possible to collect credits from
people (or ad hoc companies) close to the
person/company directly involved in the
sentence

Introduce severe anti-corruption laws

Fairness
Timing
Source: Algebris Investments (UK) LLP
Algebris Investments (UK) LLP is Authorised and Regulated by the Financial Conduct Authority
2014 Private & Confidential. Algebris Investments, 7 Clifford Street, London, W1S 2FT, United Kingdom.

Simplicity
42

Disclaimer

This document is issued by Algebris Investments (UK) LLP. It is for private circulation only. The information contained in this document is strictly confidential and is only for the use of the
person to whom it is sent. The information contained herein may not be reproduced, distributed or published by any recipient for any purpose without the prior written consent of Algebris
Investments (UK) LLP.
Algebris Investments (UK) LLP is Authorised and Regulated in the UK by the Financial Services Authority. The information and opinions contained in this document are for background
purposes only, do not purport to be full or complete and do not constitute investment advice. Algebris Investments (UK) LLP is not hereby arranging or agreeing to arrange any transaction in
any investment whatsoever or otherwise undertaking any activity requiring authorisation under the Financial Services and Markets Act 2000.
This document does not constitute or form part of any offer to issue or sell, or any solicitation of an offer to subscribe or purchase, any investment nor shall it or the fact of its distribution
form the basis of, or be relied on in connection with, any contract therefore.
No reliance may be placed for any purpose on the information and opinions contained in this document or their accuracy or completeness. No representation, warranty or undertaking,
express or implied, is given as to the accuracy or completeness of the information or opinions contained in this document by any of Algebris Investments (UK) LLP, its members, employees or
affiliates and no liability is accepted by such persons for the accuracy or completeness of any such information or opinions.
This document is being communicated by Algebris Investments (UK) LLP only to persons to whom it may lawfully be issued under The Financial Services and Markets Act 2000 (Financial
Promotion) Order 2001 including persons who are authorised under the Financial Services and Markets Act 2000 of the United Kingdom (the Act), certain persons having professional
experience in matters relating to investments, high net worth companies, high net worth unincorporated associations and partnerships, trustees of high value trusts and persons who qualify
as certified sophisticated investors. This document is exempt from the prohibition in Section 21 of the Act on the communication by persons not authorised under the Act of invitations or
inducements to engage in investment activity on the ground that it is being issued only to such types of person.
The distribution of this document may be restricted in certain jurisdictions. The above information is for general guidance only, and it is the responsibility of any person or persons in
possession of this document to inform themselves of, and to observe, all applicable laws and regulations of any relevant jurisdiction.
Past performance is not necessarily a guide to future performance. The strategy employed may result in the NAV exhibiting a high level of volatility and so is suitable for professional
investors only.
Algebris Investments (UK) LLP, 7 Clifford Street, London W1S 2FT, UK. Company registration no.:OC319392.

Algebris Investments (UK) LLP is Authorised and Regulated by the Financial Conduct Authority
2014 Private & Confidential. Algebris Investments, 7 Clifford Street, London, W1S 2FT, United Kingdom.

43