Aleph: sovereign solvency and liquidity

[yoganmahew]

alephblog.com/2010/12/01/noniden … idity-iii/
(Courtesy of FTAlphaville)

Nonidentical Twins: Solvency and Liquidity (III)

This is the third part of an irregular series on solvency and liquidity. This time, though, I am not focusing on corporations, or accounting rules, but on countries and municipalities.

With the crisis in the Eurozone, there are times of calm, and then times of panic, with seemingly little warning for transitions. Let me try to explain why this happens, even though it won’t explain why it happens on a particular day.

A country with a profligate fiscal policy builds up debt beyond its ability to repay if bad times were to come, but times are good, the country is growing rapidly, and most think that there will be more than adequate ability to repay given the growth of GDP.

Or, the financial sector grows of a nation far more rapidly than GDP, abut again, in boom times, the profits of the banks are roaring ahead, and only cowards or bears would question the prosperity of a boom.

But the truth is