Most of us probably know what “contagion” means in a biological sense – particularly after 2020 brought it home to us in a very visceral manner. But it’s also a term that crops up in financial markets. And just as “contagion” almost always spells bad news in the real world, it’s also not a term you want to hear in market news.
As a result, a financial crisis which at first seems contained in one market or sector, can spread – just like a virus – and potentially overwhelm apparently unrelated markets elsewhere. In other words, there is the risk of “contagion”.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
How does financial market contagion generally spread? Debt is a major source of contagion, and also one of its main vectors.
It’s simple when you think about it. Say a friend owes you £100. You need to get it back so that you can go to the pub that night. But when you go to collect, it turns out that he used it to take a punt on a dodgy cryptocurrency and now has no money. As a result, you can’t go to the pub, and the landlord doesn’t get your £100. That’s contagion.
To take a real-world example, the 2008 financial crisis spread globally because ownership of debt linked to US mortgages was far more widespread than most investors had realised. When US house prices fell and that debt collapsed in value, it caused panic as investors sold indiscriminately, unsure of who they could trust.
But while falling US house prices may have been the trigger for the crisis, the real problem was that financial institutions generally were over-leveraged. In other words, they had borrowed too much money, so it only took a small drop in the value of any assets they owned to render them insolvent.
This then fed into a wider crisis because bankrupt banks sold assets and stopped lending money to anyone else, which in turn caused pain in the wider economy.
To learn more about contagion and financial crises, subscribe to MoneyWeek magazine.
-
73% of savers plan to rely on partner’s pension in retirementA new survey suggests the majority of people may lack financial independence in retirement, with almost three-quarters set to rely on their partner’s pension
-
How much you need to follow the 25x retirement rule – will you have enough to be financially independent?We explain what the 25x retirement rule is and the amount you would need to be financially independent in retirement.
-
Halifax: House price slump continues as prices slide for the sixth consecutive monthUK house prices fell again in September as buyers returned, but the slowdown was not as fast as anticipated, latest Halifax data shows. Where are house prices falling the most?
-
Rents hit a record high - but is the opportunity for buy-to-let investors still strong?UK rent prices have hit a record high with the average hitting over £1,200 a month says Rightmove. Are there still opportunities in buy-to-let?
-
Pension savers turn to gold investmentsInvestors are racing to buy gold to protect their pensions from a stock market correction and high inflation, experts say
-
Where to find the best returns from student accommodationStudent accommodation can be a lucrative investment if you know where to look.
-
The world’s best bargain stocksSearching for bargain stocks with Alec Cutler of the Orbis Global Balanced Fund, who tells Andrew Van Sickle which sectors are being overlooked.
-
Revealed: the cheapest cities to own a home in BritainNew research reveals the cheapest cities to own a home, taking account of mortgage payments, utility bills and council tax
-
UK recession: How to protect your portfolioAs the UK recession is confirmed, we look at ways to protect your wealth.
-
Buy-to-let returns fall 59% amid higher mortgage ratesBuy-to-let returns are slumping as the cost of borrowing spirals.
