Why is liquidity so important to business markets around the world?
The last 12 months has seen major changes in financial markets around the world but there is one element which keeps hitting the headlines which is liquidity. So what exactly does this entail and how is it so vital to the worldwide economy?
In simple terms liquidity is the money which is made available on the money market for companies to cover short term obligations and running costs for their business, whether it is associated with the financing of debts or the funding of mortgage agreements or any other matter associated with business. In short it is the life blood of any industry, any economy and any individual business.
The reason why money market finance is so important is because as well as giving companies the means by which to borrow money on a short term basis it also gives cash rich companies the opportunity to lend money to third parties and receive interest at an agreed rate - i.e. it allows them to make their money work for the business.
You can have the largest asset base in the world, the best run business but if you need short term finance and are not able to lend against or liquidate any of your assets then you are in trouble. We saw this scenario with AIG in the US whereby the group had literally billions of dollars of assets but required short term funding to cover liabilities. As the money markets stalled and finance was not available the company could not borrow against its asset base and hit short term difficulties - resulting in the US government bailout.
Share this..
Related stories
UK Gilt market continues to rise
As we covered last week, the UK gilt market continues to rise on expectations that the Bank of England will soon pump up to £150 billion into the market by buying up government securities and other financial instruments. The acquisition of these investments, via quantitative easing, would increase liquidity in the market place for both the government and financial business in the UK.
Read More
Charity begins at home
Since the beginning of the ongoing recession, donations to UK charities have collapsed and the UK government, often a supporter of good causes, has also left the sinking ship. The sector is now very much smaller than it was at the start of the recession and even though many of the larger charities appear to be coping well, there have been significant hits across the board. So what next?
Why are UK energy bills so high?
As we covered yesterday, Ofgem, the UK energy regulator, has warned that UK energy bills could top £2000 a year in the future unless action is taken to fund the £200 billion required to see the UK meet carbon emission targets. There is no doubt that the UK energy market is one of the most expensive in the world and despite variations in gas and electricity prices the general trend in UK energy b...
Read MoreSwine flu fears hit the market
Stock markets around the world fell today in light of the outbreak of swine flu which has escaped from Mexico to countries as far away as New Zealand, Canada, Scotland, Israel and the United States of America. While we have seen potential pandemics come and go there are many experts who believe this particular outbreak has the potential to impact upon not only for the worldwide economy but the wor...
Read MoreIs deflation still a major problem?
Only a few days ago the inflation figures surprised on the upside and many analysts believed this was the beginning of the end of the recession. However, today's release of the August monetary policy committee notes suggest that Mervyn King, and two other members of the MPC, believe the economy is still struggling and deflation could be a major problem in the weeks and months ahead.
...