Greek crisis looms over Albania

Greek crisis looms over Albania 

Tirana Times -

By: Anastasia Nazarko 

In an exclusive interview with Tirana Times, Dr. Jens Bastian, Senior Economic Research Fellow at ELIAMEP, Athens, Greece, discussed the Greek economic crisis which has resonated throughout Europe, and evaluated its specific implications for Albania. 

Q: How would you assess the current state of affairs in the Greek crisis; and more importantly, it’s implications for Albania? 

The political and central bank authorities in Tirana should not underestimate the potential adverse consequences of the twin Greek economic and sovereign debt crises. Their implications medium-term are considerable. Some spill over effects are already manifesting themselves in Albania, e.g. concerning reverse labor migration, the level of remittances being sent home from Greece and Albania’s capacity to further place sovereign debt in international bond markets at reasonable yield levels. In a word, despite a remarkable economic success story during the past years, Albanian policy makers would make a grave mistake by judging that they are immune to developments in neighboring Greece. 

Q: Several bank authorities in Albania have stated that Albania shows evidence of resisting the Greek crisis due to increasing bank deposits despite decreases in remittances. Could this be accurate, and if so, would this imply that the Albanian political and bank authorities have indeed taken adequate measures to cushion Albania from any spill-over effects? If not, what other precautions should be taken? 

Firstly, the risk perception of the region is changing as a consequence of the crisis in neighboring Greece. Increasing risk aversion will make it more difficult to auction sovereign debt priced at affordable levels for Greece’s neighbors, including Albania. Secondly, the focus of the region’s central bank governors and finance ministers must be to increase their level of domestic and cross border cooperation and stay the course. No country in the region can mitigate the adverse consequences of the Greek crisis on its own. It is therefore crucial to pool resources in areas such as capital requirements for financial institutions and reduce the level of loans denominated in foreign currencies, e.g. in the mortgage and consumer sectors. 

Q: How valid do you consider the speculations that the Greek crisis may eventually mean the end of the Eurozone? 

In my view, this is where the ‘red line’ must be drawn by policy makers and central bank authorities in Athens and across the 17-member euro zone. The government of PM Papandreou is undertaking a Herculean task to implement an unprecedented structural reform agenda and harsh austerity measures under conditions of a three-year economic recession. The success of this real time experiment is anything but guaranteed and the adverse social consequences are everywhere to be seen across the country. But under these circumstances any speculation about euro exit options – voluntary or forced – are not at all helpful. In fact, they are a distraction from what needs to be done fast and with verifiable progress on the ground in Athens. 

Q: It seems as though a majority of large economies around the world (the U.S. and Eurozone members) are also finding themselves in difficult circumstances again. Are these the ripple effects of the Greek crisis, lingering elements of the global financial crisis (which perhaps never went away), or a new phenomenon? If you do not consider it to be entirely related to the Greek crisis, what then brought about this resurgence of difficulties? 

The Greek sovereign debt crisis and subsequently the Irish and Portuguese crises now means that three out of 17 member states of the euro zone have international financial rescue packages at their disposal with very strict policy conditionalities attached to them. However, we should not commit the mistake of submitting to short memories. These crises in Athens, Dublin and Lisbon are the tail end of a much larger crisis that originated mid-2007 in the financial industry of the U.S.A. and that was built on unsustainable levels of debt in the public, private and corporate sectors. What we are witnessing in the euro zone since almost two years are the weakest countries being subject to the consequences of their policy mistakes first. In Greece it was unsustainable public debt and irresponsible government expenditure. In Ireland the bubble burst in the housing and mortgage sector and collapsing banks were bailed out by government intervention, which subsequently impacted on budget deficits and public debt levels. Portugal is a mixture of both countries which was also characterized by stagnant economic performance since a decade. 

Q: Finally, how do you think these financial difficulties will play out in the future? What can be done to curb them and eventually restore financial stability to European and even American markets? (I would assume both eventually need to be stabilized because, in many ways, they rely on each other.) 

The levels of financial interconnectedness that exists today on a global scale and the amounts of public as well as private debt that have been accumulated require coordinated and cooperative solutions. Any assumption of ‘going it alone’ for a country or cluster of countries will fail big time. We are witnessing today that a country such as Greece, whose GDP is roughly 3 percent of the euro zone can bring the threat of contagion to almost every other country inside the single currency and extend potential spill over effects all the way to US shores. It is not a coincidence that emerging market countries such as China, Brazil, Indonesia, India and Russia have articulated their willingness to contribute to comprehensive solutions to the sovereign debt crisis in the euro zone. But it needs to be done fast. Over the course of the past two years we have wasted precious political capital and time is currently not on our side.