Besides the swiftly spreading coronavirus pandemic, the world is currently facing another crisis, which is liquidity crisis. So, what is it actually?
Basically, liquidity crisis is a financial situation in which there exists an acute shortage of easily-convertible-to-cash assets. Additionally, the condition emerges when businesses or financial situations experience the shortage simultaneously.
Accordingly, this results in an exponential increase of demands while the liquidity supply is strictly limited. In the long run, this might lead to a massive bankruptcy or economic downfall.
Among the reasons that might prompt this crisis is a massive economic shock or an ordinary cyclical change in the economy. However, the reason most of the time is maturity mismatching between assets and liabilities.
Actually, liquidity problems can occur in a single institution. Nonetheless, if a majority of institutions happens to have the crisis at nearly the same time, then it can be recognized as a liquidity crisis.
Also Read: Possible 2020 Global Recession and Its Causes
The Current Liquidity Crisis that We Face
On February, Christopher Joye, Co-Chief Investment Officer of Coolabah Capital Investments, warned the Reserve Bank of Australia about the potential crisis.
Just recently, Federal Reserve of the US bails out from mortgage-backed securities causes liquidity crisis in the mortgage market. The actions cause another price volatility after a few days of calm.
The biggest case of liquidity crisis, in addition, begins as COVID-19 spreads. As many businesses and people facing this financial crisis, this might create a domino effect, causing others to collapse.
If this overgrows into something that is so extraordinarily massive, there will be no instant fix to this problem. As there will be not enough supply and the demands keep on rising, banks and government will have to classify which should receive loans and which should not.
Also Read: What is a Currency Crisis?
