The Value of Liquidity: Can it be Measured?

Jun 1, 2010

The Value of Liquidity: Can it be Measured?

The notion of liquidity has never been more relevant or as frequently referenced as it is today. But what precisely does liquidity entail and why is it so important? Theoretically, it is the ability to readily access funds when needed at a minimal cost. Practically, however, it is much more complex to define and is a broad concept that affects us all in one form or another (e.g., the availability of loans at affordable (yet risk adjusted) rates, the ability to fund transactions, free movement of cash flows, inter-bank loans and inter-country borrowing). The latter, in the wake of the current European sovereign debt crisis, has reached new dimensions with a EUR 750 bn bailout to help struggling countries meet their obligations and ensure monetary stability. Without this injection of liquidity, there could be far reaching economic and social consequences that would transcend national boarders. However, it remains to be seen if these measures are sufficient, as recent economic indicators suggest that liquidity may still be constricting, particularly within the “PIIGS” countries.