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Liquidity & Solvency

Liquidity and Solvency

Liquidity

Liquidity is best described as an organisation that has the ability to meet its financial commitments, but may have cash flow issues. This means in accounting terms the assets of the organisation exceed its liabilities.
An illiquid organisation may not be able to immediately meet its financial obligations, but has sufficient assets to cover those obligations should it need to do so.

Solvency

Solvency, in finance or business, is the degree to which the current assets of an individual or entity exceed the current liabilities of that individual or entity.
If an individual or entity is insolvent, by definition its liabilities exceed its assets, which means the individual or entity does not have the ability to meet its financial obligations.

The financial crisis of 2008/09 was treated as an issue of illiquidity, when in fact it was an issue of insolvency. The bailouts would have helped liquidity problems, they can’t help insolvency problems.

Most banks are insolvent, and most countries are insolvent. We have Zombie Banks and Zombie nations.

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