Albania on brink as the pyramid totters

The largest of Albania's so-called pyramid investment schemes, Vefa Holdings, appeared to be on the brink of collapse last night as it announced it was halting interest payments and setting up a schedule to reimburse investors with at least part of their capital.

The news, announced through a megaphone at Vefa's headquarters in the capital, Tirana, and confirmed by the company's president, Vehbi Alimucaj, in an interview with the Albanian service of the BBC, has the potential to create economic and political pandemonium in a country already hit by severe rioting over the past few weeks.

Hundreds of thousands of Albanians have money tied up in Vefa's investment scheme, which has been the most popular outlet by far for savers over the past two years. As Mr Alimucaj said earlier this week: "Not a day goes by without an Albanian having something to do with Vefa."

As other pyramid schemes ran into trouble, it cut interest rates from 6 per cent a month to 3 per cent, and switched payments from hard currency to the Albanian lek. But yesterday was the first time it halted payments altogether. The collapse of Vefa's investment arm would raise urgent questions about the creditworthiness of its other overt activities, which include hotels, restaurants, supermarkets, chicken farms, ferry services and bitumen production.

Western intelligence sources say it also risks sparking a kind of turmoil that will make the looting, burning and street battles of the past few weeks look like a children's tea party. Vefa is suspected of controlling major interests in arms and drugs smuggling and its collapse, according to the intelligence sources, runs the risk of sparking an armed conflict between rival mafia gangs seeking to pick up the business it leaves behind.

The immediate reaction was muted yesterday, as the news took some time to trickle out. There was a brief spasm of panic outside Vefa headquarters as investors feared they would lose their money altogether, followed by calm as they were told to start coming back today to claim their capital.

The company said it would make lump-sum payments immediately to anyone who had invested up to $5,000 (pounds 3,125), gradually repaying those with capital up to $20,000. It was not clear what would happen to those who had invested more. Mr Alimucaj recently said his company had assets of $600m. Its liabilities, according to diplomatic sources, could be three times that.

The growing conviction that Vefa is on the brink of bankruptcy sparked political manoeuvring over the past few days. President Sali Berisha, whose Democratic Party has near-total control of the levers of power and the institutions of state, has gone on a tour of the country to make personal contact with the people and make extravagant promises such as the abolition of tax in some areas for the next two years.

He has tried to sound tough as well as tender, making clear the government can only repay assets frozen from failed pyramid schemes, not bail out the population from its own overstretched resources. But the aim of the tour is clearly to save his own political hide and distance himself from his own government.

A growing throng within the Democratic Party is demanding sweeping changes. A memorandum presented at a meeting of the party's National Council by a prominent group of parliamentarians last week called for the dismissal of the government and its replacement by an emergency cross-party administration, the departure of Mr Berisha from the party in the interests of bolstering his presidential impartiality, and a postponement of next month's presidential election pending a full political resolution to the crisis.

Mr Berisha, who has put out discreet personal feelers to the opposition in recent months, is said to have agreed with every point except the one concerning his departure from the party. The former Democratic Party chairman, Eduard Selami, who has spent the past two years in exile in the US after his fall from grace in Albania, returned home on Friday and is believed to be engaged in discussions about the possibility of his heading a transitional cross-party government.