The Impact of Sovereign Risk in the Business Cycle – Case Albania

Abstract

The sovereign credit risk is becoming one of the most concerns for the international financial community, and understanding its nature and its effect on the real financial market is very crucial. The sovereign defaults tend to cluster at business-cycle frequencies, the business itself defaults tax authority payments and loan repayments, in turn all serving to creating a vicious cycle in the entire financial market.  Country Risk is the major factor, indicating in the default of credit swap, and this is more intuitive, rather than taken from frequency macroeconomic data, which are highly missing in the transition economies like Albania. Country sovereign rating for Albania, assessed by the International Intelligence Agencies, historically shows that Albania is a risky country and that is why the Foreign Direct Investments had been in a moderate level through the time. Beyond borrowing in foreign currency from Albanian Government, accompanied by a devaluation of national currency during crises, the higher debt service cost has contributed in a comparably lower level of Foreign Debt. Notwithstanding the positive developments in the country, the Albanian market economy, it is still far from being a stable & developed one in a longer term, and be considered as an attractive country for foreign investments. The global economic crises revealed real problems of the economy, by showing that positive trends of GDP growth, during the first years, failed to create an essential and steady base for a sustainable development. The sovereign credit risk is a combined product of many country-specific factors, and also global ones, which in turn should be diminished by installing and applying modern portfolio diversification methods.

Keywords: sovereign Credit risk, Country sovereign rating, credit default swap, debt servicing, foreign debt.