Contagion
Categories: Econ, Financial Theory
Waaaay back machine'd...
In 2011, Europe's financial system caught a cold on concerns that Greece would default on its debts. The world economy quickly caught the flu. This was an example of contagion.
Contagion happens when financial risks in one country or region quickly spread across global markets. This economic and financial phenomenon can happen when investors start to focus on issues like debt and illiquidity.
For example, if one nation sees its interest rates spike due to concerns about its ability to service debt, and the currency falls...a similar reaction may occur on the other side of the world where another nation faces related financial uncertainties.
It’s just like what happens when someone who is sick drinks out of a glass. Then everyone starts doing it. And pretty soon the entire college campus has a stomach bug that fuels a run in local grocery stores on Pedialyte.
The difference between these two scenarios is that one is a possible catalyst for a severe global market crash, and the other is a catalyst for sharp demand in...chicken noodle soup.
It’s worth noting, however, that this isn’t limited to just market downturns. Sharp economic growth in one region can bolster growth in nearby areas.