Two Causes Of Financial Liquidity

Financial distress is often expressed as a force that drives most of the corporate decisions. However, many researches argue that there is weak comprehension of the duties of and connections between corporate illiquidity and insolvency; the most important two causes of financial distress.

Corporate liquidity is an interim characteristic that often referred to as the measure of the extent to which a company, an organization or a person has cash to pay for the short-term obligations. In accounting, liquidity is an extent of the capacity of a debtor to pay the debts when they are expected to be paid. It is often expressed as a fraction or a proportion of current liabilities.

Corporate solvency, on the other hand, is the capacity of a person

Government debt, public debt, national debt and sovereign debt are mostly terms used to express the amount of debt possessed by a central government. Government debt is considered one of the methods that finances government operations. Governments can remove the need of paying interest by converting their national debt into money. But this process simply lowers government interest costs rather than truly eliminating the government’s debt, if used unsparingly, hyperinflation is one result to be expected.

Issuing securities, bills and government bonds, is usually how governments borrow. Borrowing from a supranational organization is another option for less creditworthy countries. There are many aspects that a sovereign debt changes inside and outside countries, like the maturity of the debt, the currency which issued the debt and finally the nominal or real interest rate offered by the debt. In theory, it is risk free, as the government will exert extreme measures to insure the repayment.

But not all countries are so stable. Nations with high inflation or unpredictable exchange rates often issue government debt instruments with higher yields in order to attract risk-taking investors. If a country can issue too much debt and cannot afford to repurchase securities, it has

A state which for some time does not meet the outstanding interest payments or principle due to no liquid assets, it's in default because of liquidity. This situation changes once the assets are liquefied. On the contrary to insolvency, illiquidity is a temporary state caused by the external market failure. This accounts for the willingness of creditors to provide alternative arrangements for debt repayment.

Country governments cannot file bankruptcy once defaulted, they must provide an offer of debt exchange to debt holders.

At this point, officials will generally devalue the national currency to lessen their debt load. This reduces the currency’s purchasing power and often inspires greater exportation, which can help boost GDP. However, currency devaluation means that domestic money is instantly worth less; therefore, country's citizens lose their purchasing power and the purchasing confidence goes down as well. This is what happened in Peru and Argentina, 1996 and 2001