The repercussions of the turmoil in the US subprime mortgage market are increasingly being felt around the world. What was initially thought to be a problem confined to a US credit market segment has increasingly transformed itself into an erosion of investor confidence in credit quality in general and, in some countries, concerns about the reliability of the banking sector.
The most obvious symptom of eroding confidence is the alleged “liquidity crisis.” The term “liquidity” usually denotes the possibility to buy or sell a financial asset at any one time without causing noticeable changes in the price of the product being bought or sold. Market participants speak of “illiquidity” when it is no longer possible to sell financial products, or if selling is possible only at greatly diminished prices.
In recent weeks, a number of financial market segments have indeed become illiquid in the sense defined above. FULL ARTICLE