International Financial Contagion: An Overview of the Issues and the Book

Abstract

Before 1997, the term “contagion” usually referred to the spread of a medical disease. A Lexis-Nexis search for contagion before this year finds hundreds of examples in major newspapers, almost none of which refer to turmoil in international financial markets.¹ This changed in July of 1997. A 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. These global repercussions from what began in the relatively small Thai economy have sparked the widespread use of a new meaning for the term contagion. A Lexis-Nexis search of major newspapers since mid-1997 finds that almost all articles using the term contagion referred to the spread of financial market turmoil across countries.

“Contagion: 1. a. Disease transmission by direct or indirect contact. b. A disease that is or may be transmitted by direct or indirect contact; a contagious disease. c. The direct cause, such as a bacterium or virus, of a communicable disease. 2. Psychology: The spread of a behavior pattern, attitude, or emotion from person to person or group to group through suggestion, propaganda, rumor, or imitation. 3. A harmful, corrupting influence: ‘feared that violence on television was a contagion affecting young viewers.’ 4. The tendency to spread, as of a doctrine, influence, or emotional state.”

-American Heritage Dictionary