I read a news on Inquirer.net saying that Manila City Hall is "virtually bankrupt." The article cited that the local government does not have enough cash to pay off its debt (which is three times more that its cash). Yikes! (Read the article here.)
Is this a reason to panic?
The thing is, there's a difference between liquidity and solvency.
Liquidity is basically one's capability to meet its current obligation when it falls due. "Current obligation" usually means payable within one year. So for example, I have Php 50,000 credit card bills due next week (current) but only Php 20,000 cash. I am not liquid at the moment because I cannot pay the whole Php 50K. However, I can borrow (from a bank or from my rich friends) or wait until next payroll. In any way, there's a workaround.
On the other hand, solvency is "the ability of a corporation to meet its long-term fixed expenses and to accomplish long-term expansion and growth" (Definition from Investopedia.) From my example above, let's say I cannot borrow from a bank (because of my poor credit standing) neither from my friends (because they are not rich). There is also no next payroll (because I've been fired.) Then I can consider myself insolvent because of my inability to pay for both my current and long-term expenses. In this case, I have to think some ways to generate cash (e.g. sell my clothes, shoes, and investments), or else, I will be bankrupt.
While Manila City Hall is obviously not liquid, they can still manage to collect more taxes. Further, they should learn how to manage their cash well (Php 40.812 M tax payment discount without any legal basis, are you kidding me?)
In conclusion, it is better to be not liquid than insolvent, however, this is not to say that it's fine to have more debt than asset. Not at all. Liquidity is a way to measure how well a company, or a local government, manages their cash, but in this case, it seems that the management is not so good.
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