"When bankruptcy comes, it does so normally as a result of a liquidity crisis. This is true for countries as much as it is for companies. It's not as if someone in charge walks in one day and says "you are insolvent so you must default immediately." That is what happens in the case of banks seized by the regulator.
In other cases of insolvency, creditors become spooked about longer-term insolvency. At first, they demand a higher return for their loans. Eventually, they pull in their horns altogether. Liquidity dries up and the company or country is unable to roll over its debt requirements. It literally runs out of money.
This is exactly what happened to Northern Rock, Bear Stearns and Lehman Brothers in 2007 and 2008. They ran out of money because no one was willing to lend to them – quite different from the bank seizures we see the FDIC conducting every Friday.
The problem, of course, in a financial crisis is that everyone is panicked and eyeing everyone else warily. Solvent companies can be taken down in the crisis too.
-Liquidity and Solvency, May 2010
The European Debt Crisis is a solvency crisis. But when bankruptcy comes, it is normally the result of a liquidity crisis. Politicians dither and try to resist the inevitable, eventually creating panic and bailouts. At some point this approach either papers over losses at taxpayer expense or it fails catastrophically.
I have been saying for some time that the likely failure of policy makers to deal with the sovereign debt crisis will be the origins of the next crisis. But I am a eurosceptic. Of course I would say that. Shouldn’t you believe that my own cognitive biases are driving my conclusions?..."
at http://www.creditwritedowns.com/2011/08/the-european-sovereign-debt-crisis-is-a-solvency-crisis.html
In other cases of insolvency, creditors become spooked about longer-term insolvency. At first, they demand a higher return for their loans. Eventually, they pull in their horns altogether. Liquidity dries up and the company or country is unable to roll over its debt requirements. It literally runs out of money.
This is exactly what happened to Northern Rock, Bear Stearns and Lehman Brothers in 2007 and 2008. They ran out of money because no one was willing to lend to them – quite different from the bank seizures we see the FDIC conducting every Friday.
The problem, of course, in a financial crisis is that everyone is panicked and eyeing everyone else warily. Solvent companies can be taken down in the crisis too.
-Liquidity and Solvency, May 2010
The European Debt Crisis is a solvency crisis. But when bankruptcy comes, it is normally the result of a liquidity crisis. Politicians dither and try to resist the inevitable, eventually creating panic and bailouts. At some point this approach either papers over losses at taxpayer expense or it fails catastrophically.
I have been saying for some time that the likely failure of policy makers to deal with the sovereign debt crisis will be the origins of the next crisis. But I am a eurosceptic. Of course I would say that. Shouldn’t you believe that my own cognitive biases are driving my conclusions?..."
at http://www.creditwritedowns.com/2011/08/the-european-sovereign-debt-crisis-is-a-solvency-crisis.html
No comments:
Post a Comment