What Is Financial Contagion?

The contagion effect is a proliferation phenomenon of the currency crisis in the international community. Currency crisis in one country may cause currency crisis in other neighboring countries, which is contagious. The contagion effect refers to the currency crisis of one country spreading to other countries with the domino effect. It emphasizes that a currency crisis in one country is the cause of the outbreak of another country's currency crisis. In other words, without a currency crisis in another country, the country would not have experienced a crisis.

Contagious effect

Right!

Contagious effect is

The infectious effect mainly comes from

evidence

Some evidence suggests that contagious effects, manifested by the growing relevance of international securities markets, were one of the causes of the emerging market crisis of 1997-1998. What this means: If emerging markets are in crisis today, this will happen again, but it is unclear

Primer

China

Introduction

In December 2005, Argentina fell into an unprecedented triple crisis, namely the economic crisis, the political crisis and the social crisis. Before the crisis broke out, the international community was worried that if the crisis in Argentina spreads to its neighboring country Brazil, the economic growth rate of the entire Latin American region will slow down because Brazil s economic total accounts for more than 1/3 of the entire Latin American region; Affected, the recovery of the US economy will be delayed. However, the "Tango effect" of the Argentina crisis at that time did not seem obvious, and international investors were relieved.

However, since the recent period, some South American countries have seen a series of worrying signs such as a decrease in foreign capital inflows, sharp fluctuations in financial markets and sharp fluctuations in exchange rates. As a result, many people point out that the "contagious effect" of the Argentina crisis has finally emerged.

"Tango effect" begins to emerge

It should be said that the recent economic situation in some Latin American countries is indeed related to the "tango effect" of the crisis in Argentina. This effect is mainly reflected in the following aspects: First, the IMF has been unable to reach consensus with the Argentine government on ways and means to resolve the crisis, thereby making people's views on Argentina's economic outlook increasingly pessimistic. Second, the United States not only failed to provide economic assistance to Argentina, but instead made remarks about Argentina's anti-crisis measures, which undoubtedly aggravated international investors' worries about Argentina's economy. Second, because the Argentine currency peso depreciated sharply after the crisis, South American countries such as Brazil, Uruguay and Chile have become more difficult to export to Argentina. Fourth, the crisis has caused Argentinean incomes to decline substantially, and bank controls imposed by the Argentine government have prevented Argentines from withdrawing cash from banks. As a result, Argentines cannot travel abroad. This has resulted in a significant reduction in tourism revenues in Argentina's neighbouring countries. Fifth, due to the close economic ties between Argentina and other South American countries, international investors have to reduce their investment in South American countries in order to avoid risks.

However, the recent economic turmoil in Latin America is also related to some non-economic factors. For example, in some Latin American presidential elections, left-leaning candidates are popular in opinion polls. These politicians said that if they were elected, they would renegotiate the terms of debt repayments with national creditors. Some candidates even said that they would postpone or refuse to repay foreign debt. This undoubtedly discourages international investors from entering Latin America. For another example, in recent months, some signs of instability have emerged in Latin American politics. Although President Kinwes has calmed down the coup, the political situation in Venezuela has not been completely guaranteed. In Colombia, the confrontation between the government and the anti-government armed forces has intensified. The political situation in some other Andean countries is also turbulent from time to time due to drug problems or other problems.

In addition to the above factors, the weak recovery of the US economy has also adversely affected the economic situation in Latin America. Since the 1990s, the trend of the Latin American economy has become increasingly constrained by external factors, especially the US economy and the world economic situation. Some people even think that the words of Fed Chairman Alan Greenspan will have greater impact on Latin American stock markets than the remarks of the Latin American countries presidents. In addition, due to the long-term weakness of the prices of primary products in the international market, Latin American countries that have obtained foreign exchange income by exporting primary products have not been harmed.

In short, due to the negative impact of the above factors, many Latin American countries' economic growth rates in the first half of the year were much lower than the forecast at the end of last year, while the unemployment rate was rising, thereby making social problems more serious.

The outlook is not optimistic

The blow to the lives of the Argentine people cannot be ignored. For example, due to the implementation of bank control measures, the purchasing power of the public has fallen sharply, but barter trade has become very active, which undoubtedly further affected the recovery of the national economy. Secondly, normal production activities have been affected as protesters against bank controls and austerity often block roads or damage public property. Third, some basic foods and medicines have been sold in limited quantities, and the unemployment rate is also rising (currently as high as 20%).

Many analysts believe that in order to get out of the crisis as soon as possible, the Argentine government may start with the currency and take one of the following measures: adopt a "currency basket" to make the peso peg to the dollar and the euro at the same time; That is, the central bank determines the scope of exchange rate fluctuations and intervenes when necessary; returns to the "exchange" system, that is, fixes the exchange rate between the peso and the US dollar at a fixed exchange rate of 2-2.5 pesos: 1 US dollar; implements complete dollarization, That is to abandon the peso and replace it with US dollars.

In any case, the situation in Argentina is not optimistic. This is related to several difficulties it faces. First, although the depreciation of the peso is conducive to exports, the increase in inflationary pressure undermines macroeconomic stability, making it more difficult for the national economy to recover. Second, in addition to more than 150 billion yuan of public debt, the Argentine government has a huge fiscal deficit. Third, since Argentina has fallen into a triple crisis of economic, political and social, the resolution of the economic crisis also depends on whether the political and social crisis can be alleviated or resolved. Fourth, the attitude of the International Monetary Fund and the United States towards the crisis in Argentina is disappointing.

As the "Tango influence" will make it difficult for the Argentina crisis to be resolved in the near future and further expand, and external factors (especially the trend of the US economic situation) are very unfavorable, the economic prospects of most Latin American countries in the second half of the year are not optimistic. For Latin America as a whole, economic growth in 2002 will not be higher than 0.5% in 2001.