The term financial contagion refers to the spread of disrupted markets, that carries from one jurisdiction to another, with mostly deleterious effects. These disrupted markets are observed through co-motion in exchange rates, capital flows, and stock prices. Financial contagions are a potential risk for countries that are looking to integrate their financial systems with international financial institutions and markets.
What Does a Financial Contagion Look Like?
Economic crises can spread throughout multiple regions very quickly. There are several factors that can cause this domino-like effect. For example, when voracious sub-prime lending kicked off the financial crisis in the US, in 2007, other financial systems were adversely impacted. Not only did millions of Americans lose their jobs, but employees around the world were also negatively impacted if the companies they worked for, had ties to American financial markets.
When Do Financial Contagions Occur?
Financial contagions can occur when there is a crisis or a recession. When financial contagion hits it starts in one location then spreads to other financial markets with widespread effect. The term financial contagion derives from the ability that downturned markets have to spread quickly and infect other economic centres. Similarly, the term financial contagion captured the unpredictable nature of complex financial markets that when spinning downward, become difficult to control.
Elaine Allan, BA, MBA
Technology & Business Blogger
Vancouver, BC, Canada