In other words, whether we like it or not, we are being priced globally by the market. 15. Many of us have not fully appreciated the full logic of this. The financial turmoil suggests that while the real sector causes of the stress is global competition, the financial effect is stress on domestic banking systems, as the banks intermediate the global portfolio adjustments. In an open economy, capital inflows will increase the deposit base of domestic banks which may be channelled through credit mistakes into fuelling domestic asset price bubbles. There are two implications. First, asset price inflation eventually feeds into domestic inflation and erodes external competitiveness. Second, excessive lending concentration into less productive assets, either real estate or over-investment in infrastructure and production capacity, exposes the financial institutions to huge risks. 16. From the viewpoint of financial intermediation, there are three major risks in Asia that underlie the shocks there:  •  First, maturity mismatch -- Asian markets made the mistake of borrowing short-term capital flows to finance illiquid non-tradables, such as property, thus exposing themselves to huge liquidity needs when capital flows reversed. •  Second, currency mismatch -- corporations who borrowed foreign currency funds to finance investments that do not generate sufficient foreign exchange to repay the debt run a currency mismatch. •  Third, credit risk -- lending or investments ultimately must be against sound profits that generate long-term returns higher than the borrowing rate or prospective dividends.
Ardian Fullani: Economic developments during the second semester of 2004 and expectations for year 2005 Statement by Mr Ardian Fullani, Governor of the Bank of Albania, Tirana, 28 January 2005. *  *  *  The second part of 2004 has generated a larger economic activity, marking a certain general impulse, especially after a relatively quiet start of the year. The acceleration of production growth is reflected almost in all the economy sectors, while the major objectives of the economy have been achieved in conformity with the overall programme of the country's economic and financial development. At international level, this semester coincided with an acceleration of the confirmed tendencies in the first part of the year, especially with regard to US dollar performance and oil price rise. The Fed monetary policy has changed the monetary policy tendency, during this period, through some successive increases of the core interest rate, in attempting to prevent the inflationary pressures in the economy. On the other side, the European Central Bank, considering the inflation performance and the strong pressure against the Euro has deemed unreasonable to change the core interest rate, keeping it at the level of 2 percent for almost a year and half. Annual inflation in December resulted 2.2 percent, while the average annual inflation was only 2.9 percent. The maintenance of inflation within the targeted range was mainly attributed to the stable macroeconomic situation, the control of domestic demand of the economy and monetary indicators stability.