“liquidity crisis” or a “solvency crisis” – 2008

I have been reading Noah Smith  work and found very interesting, sharing the  2008,  financial crisis that was unfolding, there was bloga big argument as to whether the crisis was a “liquidity crisis” or a “solvency crisis”. It’s a very important distinction. A “liquidity crisis” is when banks (or similar finance companies) are financially in the black – their assets are greater than their liabilities – but they can’t get the cash to keep paying their bills in the short term. A bank run is the classic example of a liquidity crisis – even if the bank could eventually pay everyone back, it can’t pay them back all at once, so if people get scared and all try to withdraw their money in a rush, they force the bank to collapse. A “solvency crisis”, on the other hand, is when finance companies are actually bankrupt, and no amount of short-term borrowing will change that fact.

This question has important policy implications in a financial crisis. If companies are illiquid but solvent, you just need to have the Fed lend them money to tide them over until liquidity comes back. If they’re insolvent, you either need to bail them out, or help them into an orderly bankruptcy, in order to reduce systemic risk caused by disorderly failure. Continue reading ““liquidity crisis” or a “solvency crisis” – 2008″

2012 Mid Year World economy towards the path of Bailouts & Bankruptcies

Well its the last day of the month and the world economy standing in the mid of year 2012. Lets try to pull the events by connecting the dots and see where the world is :
1) After months weeks years of posturing and denial Spain and Cyprus formally requested aid from Europe bailout funds. More so they have officially confessed to their insolvency and the insolvency of their banking system.
Spain 10 year bond yield breached the worst level and it touched the 7% in return many od the Spain bank ratings got junk by Moodys

2) Over in the US, the city of Stockton, California filed for bankruptcy this week… Continue reading “2012 Mid Year World economy towards the path of Bailouts & Bankruptcies”

Contagion Predicting for Euro

Well the election is over in Greece and the New democracy party gained and possible that they will need support from Syriza to form the government. The question still remain in my mind. Can the Greece leave he euro quietly ? well possible but a lot of arguments has already been put in to  posts and the economists, financial baron have discussed.

When I say possible because the Greek economy is just 2% of the Euro zone GDP. but here again it  already had plenty of noise knock on effects. Continue reading “Contagion Predicting for Euro”

Italy next on the radar – Europe

Source: International Monetary Fund.

It has been correctly quoted that picture speak more than the words. So what does the graph looks like, Not more can be said for them as we focusing on Europe back again. Continue reading “Italy next on the radar – Europe”