The Schemes Were the Banking System

Vlorë is a port at the point where the Adriatic becomes the Ionian, with a long promenade, a good market and a habit of going first. Independence was declared here in 1912. In January 1997 it was where the crowds came out, after a Vlorë company called Gjallica — founded by three former state security men, and paying spectacular monthly returns to tens of thousands of depositors across the south — declared bankruptcy. Within six weeks the police had left the city, the army depots had been emptied of their weapons, and the government in Tirana had lost control of most of the country south of the Shkumbin.

The scale is the part that is hard to convey. A study by the IMF's Christopher Jarvis put the nominal liabilities of the Albanian pyramid schemes at the end of 1996 at around $1.2 billion, close to half of the country's annual output, with something in the order of two-thirds of the population invested. About 2,000 people died in the disorder that followed. This was not a fraud that caught the gullible. It caught almost everybody, including people who had sold a flat or a cow to take part, and understanding why requires setting aside the idea that they were being stupid.

A country with no banks

Albania came out of 1991 as the poorest and most isolated country in Europe, having spent four decades under a leadership that broke with Yugoslavia, then the Soviet Union, then China, and criminalised private enterprise more thoroughly than any other state in the bloc. What passed for a banking system was a handful of state institutions loaded with unrecoverable loans and unwilling to make new ones: a business could not borrow because there was effectively nowhere to borrow from, and a household could not earn a return on savings because there was nowhere to put them that paid one. Into that gap came informal lending, and then companies. Several of the early ones had real businesses behind them, and some of those businesses were the smuggling of fuel and goods into rump Yugoslavia during the UN embargo of 1992 to 1995, which was extremely profitable while it lasted. The first depositors were genuinely paid out of trade, and they told their neighbours.

The arithmetic nobody was doing

A pyramid does not need anyone to lie about the mechanism. It needs new money arriving faster than old money is claimed. Through 1995 and 1996 the Albanian companies began competing for deposits, and the rates escalated the way rates in an auction escalate — from a few per cent a month to offers that would double or treble a deposit within a season. At those levels no underlying business exists that could service them, and after the embargo was lifted in late 1995 the underlying business had largely gone anyway. The inflow was the income.

The government did not stop it. The IMF and the World Bank warned through 1996 and were told the companies were private matters; the largest of them sponsored the ruling Democratic Party's campaign for the May 1996 elections, a poll international observers criticised sharply. Being tolerated by the state is not the same as being guaranteed by it, but to a depositor in Fier deciding whether to hand over a year's wages, a company whose name is on the football stadium and whose owner stands beside ministers does not look like a back-street operation.

A scheme like this does not collapse when people work out what it is. It collapses when the queue at the door gets shorter, and by then everyone in the queue is already inside.

Six months without a state

Sude had already defaulted in November 1996; when it and Gjallica both went bankrupt in January 1997 the protests started immediately. By early March they had become an uprising in the south. Army and police armouries were broken open and emptied — estimates of the small arms taken run to well over half a million, along with ammunition by the tonne — and the weapons went into private hands, across borders, and into the criminal economy for years afterwards. Insurgent committees ran several southern towns. The UN Security Council authorised a multinational protection force under Resolution 1101 on 28 March, and Operation Alba, Italian-led and around 7,000 strong from eleven countries, went in during April with a mandate limited to escorting aid and securing the ports and airport. Elections at the end of June returned the Socialists; President Sali Berisha resigned in July; the force left in August.

What depositors got back was very little. Foreign administrators were appointed to the largest companies and spent years working through assets that in many cases had never existed. A new banking law in 1998 gave the central bank supervisory powers it had not previously had and made unlicensed deposit-taking a matter for the courts; the state savings bank, which still held most of what money remained in the formal system, was eventually sold to an Austrian bank in 2004. A UN development programme spent years buying looted weapons back village by village, paying in roads and telephone lines rather than cash, and never recovered all of them.

What it did to the next thirty years

Two years after the collapse, in the spring of 1999, close to half a million refugees crossed into Albania from Kosovo during the NATO air campaign — roughly one arrival for every seven residents, absorbed largely by families taking people into their houses, by a state that had been in pieces twenty-four months earlier. Kosovo declared independence in 2008; Albania recognises it, Serbia does not, and the status remains disputed at the United Nations. That is worth stating plainly rather than assuming, because visitors arrive with the region's arguments half-heard and it is easy to be confidently wrong in either direction.

The 1997 collapse is still the reference point for how Albanians talk about institutions. It is the reason emigration accelerated in the late 1990s, why so much of the coastal construction you drive past is financed by remittances rather than mortgages, and why a great deal of business here is still done in cash between people who know each other. Nobody puts up a plaque to a pyramid scheme, so there is nothing to visit. But when someone in Vlorë tells you that trusting a written guarantee is a foreigner's habit, they are not being cynical for effect. They are describing something that happened to their family within living memory, and that has never been fully paid back.