Contagion Effect - History

History

See also: 1997 Asian Financial Crisis See also: Subprime mortgage crisis See also: Greek Bond Crisis See also: European sovereign debt crisis

While there was a period of systemic crisis in emerging countries in the early 1980s, both academia and policy circles did not analyze the crisis from a systematic point of view. Even when Latin American countries fell like dominoes into an abyss of successive devaluations, banking crises and deep recessions, much of the blame was placed on poor domestic policies and high real interest rates in the United States, with little attention focusing on the possibility that financial crises could be spreading and contagious.

A Lexis-Nexis search for contagion before 1997 finds hundreds of examples in major newspapers, almost none of which refer to turmoil in international financial markets. The term “contagion” was first introduced in July 1997, when the currency crisis in Thailand quickly spread throughout East Asia and then on to Russia and Brazil. Even developed markets in North America and Europe were affected, as the relative prices of financial instruments shifted and caused the collapse of Long-Term Capital Management (LTCM), a large U.S. hedge fund. The financial crisis beginning from Thailand with the collapse of the Thai baht spread to Indonesia, the Philippines, Malaysia, South Korea and Hong Kong in less than 2 months. After that, economists realized the importance of financial contagion and produced a large volume of researches on it.