Otherwise, a liquidity run would create solvency problems for all the big eurozone debtors.

Easier monetary policy may boost liquidity, but it will not resolve the solvency crisis.

First, the factors which allow a distinction to be made between liquidity and solvency problems are not clearly set. What determines a liquidity crisis?

But the liquidity crunch was not the only problem there was also a solvency problem.

The ECB s task is to provide liquidity to banks, while the EFSF and ESM are designed to absorb solvency risk.

But by stubbornly arguing that that these countries are facing a liquidity crisis, rather than a solvency problem, euro officials are putting entire system at risk.

And that means that the financial institutions that own them cannot have confidence in the liquidity or solvency of potential counterparties or even in the value of their own capital.

In terms of substance which the German Constitutional Court explicitly and intentionally avoids the case for OMT has always been about preventing a liquidity crisis from morphing into a solvency problem, especially on the eurozone s periphery.

Meanwhile, global investors are questioning local governments solvency.

And then they collapsed, causing enormous damage to the government s own solvency.

Call it information liquidity, akin to financial liquidity.

If this lending approach to southern countries continues, their solvency and economic recovery will suffer.

And if a European agency is to guarantee banks solvency, that agency must also oversee them.

New financial regulations Basel 3 for banks and Solvency 2 for insurers are reinforcing these advantages.

Is Liquidity Enough?

The Liquidity Puzzle

To protect commercial banks from risking their own solvency (and the whole country s solvency besides) once again, Richard Robb suggested that a small tax on banks short term debts be imposed in order to deter banks from over borrowing.

The fact that there is even a small liquidity crunch for banks implies larger liquidity crunches for less intensively regulated financial institutions, and even greater liquidity crunches for manufacturing and real estate companies.

Greece is likely to find itself insolvent, and questions surround the solvency of Ireland and Portugal as well.

Only a government that is sufficiently powerful, in terms of legal authority and solvency, can do so.

The same crisis looks like a solvency crisis for those who are geographically distant.

The Liquidity Time Bomb

Without a return to growth, they cannot quell investors doubts about their fiscal sustainability and their banks solvency.

When a sovereign borrower s solvency has deteriorated sufficiently, its survival becomes dependent on market expectations.

Nor is it alone in ignoring the terrible solvency threat they pose and their damaging consequences to saving and investment.

Time and again, banks woes have affected governments borrowing costs, and concerns over governments solvency have affected banks balance sheets.

Confronting the Coming Liquidity Crisis

The breakdown was fundamentally a liquidity crisis, and liquidity was easily restored in several ways the New York banks issued their own liquidity through a clearing house one massively powerful financial institution, J.P. Morgan, bought up collapsing shares, and thus reversed a market panic and a scramble for liquidity and European central banks supplied gold to the American market.

Today, markets seem to think that large fiscal deficits are the greatest threat to government solvency.

The IMF recently established the Short Term Liquidity Facility to help strong performing members facing temporary liquidity problems.

European growth is constrained by debt problems and continued concerns about the solvency of Greece and other highly indebted EU members.

And, if Spain is at serious risk of default, government solvency is at risk throughout the eurozone except in Germany.

The poorer an economy s growth prospects, the larger the fiscal correction and deleveraging needed to convince markets of underlying solvency.

The third problem concerns international liquidity.

massive and unlimited provision of liquidity to solvent financial institutions

For countries with solvency problems, an adjustment program like those for Greece, Ireland, or Portugal would be appropriate.

The stunning opacity of solvency ratios encouraged regulators to turn a blind eye to banks excessive risk taking.

The level of uncertainty about asset values, solvency, and the connectedness of balance sheets that prevailed at the time was extraordinarily high.

Doubts about the Irish government s solvency would then disappear quickly, and its guarantee of bank deposits would no longer look so shaky.

If you believe that the crisis was caused by a shortage of liquidity, we had plenty of models analyzing liquidity shortages and their effects on financial institutions.

It has not, even as the European Union continues to respond inadequately to its own slow moving solvency crises.

Converting some portion of debt to equity under predetermined solvency threatening conditions would provide an extra layer of protection.

Such taxes surely reduce liquidity in financial markets.

This generates liquidity, which then stimulates GDP growth.

But haircuts in the case of a solvency crisis are indispensable for the stability of the European financial system itself.