Overall, the reforms in these markets, along with the regulatory reforms to the oversight of financial institutions, should result in more robust system of credit intermediation, whether it is taking place through traditional intermediaries or through the markets more broadly. This reform process faces several important risks, though. First, there is a possibility that the process will stagnate or end up incomplete, given that the issues are complex, the stakeholders are numerous and the solutions are not always obvious. Second, there is a risk that, with so many efforts taking place in so many areas, the results will not fit together into an effective, cohesive solution. And third, there is the risk that the pursuit of reform will be overly zealous, resulting in a set of restrictions that will significantly undermine the functioning of financial markets during normal periods and thereby impede employment and growth. On this last point, it is worth making a few observations about the functioning of financial markets as we think about how to encourage a safe and yet efficient financial sector. These points may be obvious but are worth emphasizing. First, securitization is a powerful vehicle that should play an important role in the intermediation of credit in the economy. Securitization can be quite effective at transforming illiquid assets into negotiable securities and transferring risk to a more diversified set of holders. To be sure, the expansion of securitized credit was much too extensive, and its subsequent collapse was terribly disruptive, contributing significantly to the damage to the economy.
Two basic macroeconomic policies, monetary policy and fiscal policy, have contributed toward the economic activity stabilization, without exerting increasing pressures on the inflation rate. The budget expenses during 2004 have been relatively uniform throughout the year, without jeopardizing the rise of inflationary pressures in the economy in given periods. The domestic borrowing of Government has been 2.0 percent of GDP over 2004, compared to 2.9 percent in 2003. Monetary policy The monetary policy followed during 2004 maintained the easing trend of the policy being followed during 2003. Bank of Albania has cut 5 times the core interest rate over 2004, with a total effect of 1.25 percentage points. The core interest rate reached new minimum historical levels through every cut occurred during 2004, remaining by the end of the year 5.25 percent. The easing monetary policy  4  BIS Review 38/2005  has been in compliance with the inflation developments during 2004 and the positive expectations on this indicator in the future. These developments seem to have been perceived by the public, who is increasingly anchoring the inflationary expectations to the inflation target announced by the Bank of Albania. This is reflected in the increase of public interest in depositing their savings in Lek, generating also appreciation pressures on the exchange rate in Lek. The appreciation of exchange rate in Lek, accompanied by stable inflation values in the largest trade partners of Albania, has impacted the decrease of inflation value imported during 2004.